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MISCELLANEOUS  REVENUE  ISSUES 


Y  4.  W  36: 103-64 

ffiscellaneous  Revenue  Issues>   Seria... 

HEARINGS 

BEFORE  THE 

SUBCOMMITTEE  ON  SELECT  REVENUE  MEASURES 

OF  THE 

COMMITTEE  ON  WAYS  AND  MEANS 
HOUSE  OF  REPRESENTATIVES 

ONE  HUNDRED  THIRD  CONGRESS 

FIRST  SESSION 


JUNE  17,  22,  24;  JULY  13,  1993;  AND  SEPTEMBER  8,  21,  23,  1993 


PART  2  OF  3 

SEPTEMBER  8,  21,  AND  23,  1993 


Serial  103-64 


Printed  for  the  use  of  the  Committee  on  Ways  and  Means 


oppoftrmov 


JUL2  0t99* 
BOSTONeobaGUttHAF 


MISCEIiANEOUS  REVENUE  ISSUES 


HEARINGS 

BEFORE  THE 

SUBCOMMITTEE  ON  SELECT  REVENUE  MEASURES 


OF  THE 


COMMITTEE  ON  WAYS  AND  MEANS 
HOUSE  OP  REPRESENTATIVES 

ONE  HUNDRED  THIRD  CONGRESS 

FIRST  SESSION 


JUNE  17,  22,  24;  JULY  13,  1993;  AND  SEPTEMBER  8,  21,  23,  1993 


PART  2  OF  3 

SEPTEMBER  8,  21,  AND  23,  1993 


Serial  103-64 


Printed  for  the  use  of  the  Committee  on  Ways  and  Means 


U.S.  GOVERNMENT  PRINTING  OFFICE 
WASHINGTON   :  1994 


For  sale  by  the  U.S.  Government  Printing  Office 
Superintendent  of  Documents,  Congressional  Sales  Office,  Washington,  DC  20402 
ISBN  0-16-04A369-5 


COMMITTEE  ON  WAYS  AND  MEANS 
DAN  ROSTENKOWSKI,  IllinoiB.  Chairman 


SAM  M.  GIBBONS,  Florida 
JJ.  PICKLE,  Texas 
CHARLES  B.  RANGEL,  New  York 
FORTNEY  PETE  STARK,  California 
ANDY  JACOBS,  Jk.,  Indiana 
HAROLD  E.  FORD,  Tennessee 
ROBERT  T.  MATSUI.  California 
BARBARA  B.  KENNELLY,  Connecticut 
WILLIAM  J.  COYNE,  Pennsylvania 
MICHAEL  A.  ANDREWS.  Texas 
SANDER  M.  LEVIN,  Michigan 
BENJAMIN  L.  CARDIN,  Maryland 
JIM  MCDERMOTT,  Washington 
GERALD  D.  KLECZKA,  Wisconsin 
JOHN  LEWIS,  Georgia 
L.F.  PAYNE,  Virginia 
RICHARD  E.  NEAL,  Massachusetts 
PETER  HOAGLAND,  Nebraska 
MICHAEL  R.  MCNULTY,  New  York 
MIKE  KOPETSKI,  Oregon 
WILLIAM  J.  JEFFERSON,  Louisiana 
BILL  K.  BREWSTER,  Oklahoma 
MEL  REYNOLDS,  Illinois 


BILL  ARCHER,  Texas 
PHILIP  M.  CRANE,  Illinois 
BILL  THOMAS,  California 
E.  CLAY  SHAW,  JR.,  Florida 
DON  SUNDQUIST,  Tennessee 
NANCY  L.  JOHNSON,  Connecticut 
JIM  BUNNING,  Kentucky 
FRED  GRANDY,  Iowa 
AMO  HOUGHTON,  New  York 
WALLY  HERGER,  California 
JIM  McCRERY,  Louisiana 
MEL  HANCOCK,  Missouri 
RICK  SANTORUM,  Pennsylvania 
DAVE  CAMP,  Michigan 


Janice  Mays,  Chief  Counsel  and  Staff  Director 
ChaRL£S  M.  Brain,  Assistant  Staff  Director 
PHILUP  D.  Moseley,  Minority  Chief  of  Staff 


Subcommittee  on  Select  Revenue  Measures 


CHARLES  B.  RANGEL,  New  York,  Chairman 

L.F.  PAYNE,  Virginia  MEL  HANCOCK,  Missouri 

RICHARD  E.  NEAL,  Massachusetts  DON  SUNDQUIST, 

PETER  HOAGLAND,  Nebraska  JIM  McCRERY,  Louisiana 

MICHAEL  R.  McNULTY,  New  York  DAVE  CAMP,  Michigan 
MIKE  KOPETSKI,  Oregon 
ANDY  JACOBS.  Jr..  Indiana 


(ID 


CONTENTS 


Page 

Part  1  (June  17,  22,  24;  and  July  13,  1993)  1 

Part  2  (September  8,  21,  and  23,  1993)  1055 

Part  3  (Submissions  for  the  Record — Revenue  losers  and  revenue 

raisers) 1787 

Press  releases  announcing  the  hearings  2 

WITNESSES 

U.S.  Department  of  the  Treasury,  Hon.  Leslie  B.  Samuels,  Assistant 
Secretary  for  Tax  Policy: 

June  22,  1993 299 

September  21,  1993  1397 

U.S.  Department  of  Commerce,  Diana  H.  Josephson,  Deputy  Under  Secretary 
for  Oceans  and  Atmosphere,  National  Oceanic  and  Atmospheric  Adminis- 
tration    353 

U.S.  (General  Accounting  Office,  Natwar  M.  Gandhi,  Associate  Director,  Tax 
Policy  and  Administration  Issues,  General  Government  Division,  Tom 
Short,  Assignment  Manager,  and  David  Pasquarello,  Evaluator,  Philadel- 
phia GAO  1421 

Abrahamson,  (Jen.  James  A.,  Oracle  Corp.,  and  FSC  Software  Coalition  638 

Actors'  Equity  Association,  Ron  Silver  and  Mark  J.  Weinstein  1121 

Ad  Hoc  Group  to  Preserve  Deduction  for  Advertising,  Mark  McConaghy 1171 

Advanced  Micro  Devices,  Cliff  Jemigan  265 

Advertising  Tax  Coalition 

Timothy  White  1179 

Dewitt  F.  Helm,  Jr  1184 

Aerospace  Industries  Association,  Douglas  C.  McPherson 668 

Aerospace  States  Association  (see  listing  for  Hon.  C.  Michael  Callihan) 

Air  Transport  Association  of  America,  Edward  A.  Merlis  1303 

Alfers,  Stephen  D.,  Mineral  Resources  Alliance 1265 

Alliance  for  Collaborative  Research,  Larry  W.  Sumney  371 

Alliance  for  Responsible  CFC  Policy,  Kevin  J.  Fay  1709 

Alliance  of  American  Insurers,  Robert  Jarratt 1488 

Alliance  to  Save  Energy,  Mary  Beth  Zimmerman  699 

Allis,  John  E.,  Houston,  Tex  1536 

American  Agriculture  Movement,  Inc.,  Harvey  Joe  Sanner  1740 

American  Bankers  Association,  Taxation  Committee,  Lynda  A.  Kern 192 

American  Bar  Association,  Section  of  Taxation,  Committee  on  S  Corporations, 

Jordan  P.  Rose 434 

American  Express  Travel  Related  Services,  Co.,  Richard  P.  Romeo  1153 

American  Farmland  Trust,  Edward  Thompson,  Jr 801 

American  Federation  of  Television  &  Radio  Artists,  Ron  Silver  and  Mark 

Weinstein  1121 

American  Financial  Services  Association,  Richard  P.  Romeo  1153 

American  Football  Coaches  Association,  Charles  McClendon  91 

American  Institute  of  Certified  Public  Accountants: 

Gerald  W.  Padwe  466 

Pamela  J.  Pecarich  1454 

American  Insurance  Association,  Robert  Rahn  1500 

(III) 


IV 

Page 

American  Iron  Ore  Association,  John  L.  Kelly 1275 

American  Land  Title  Association,  Irving  Morgenroth  1037 

American  Nuclear  Insurers,  Robert  Rahn  1500 

American  Public  Power  Association,  Stephen  F.  Johnson  770 

American  Society  of  Association  Executives,  Susan  Bitter  Smith 1335 

American  Vintners  Association,  Herbert  Schmidt  141 

American  Wind  Energy  Association,  Michael  L.  Marvin  756 

AmSouth  Bank  N.A.,  Lynda  A.  Kern 192 

Aponte,  Angelo  J.,  National  Council  of  State  Housing  Agencies,  and  New 

York  State  Division  of  Housing  and  Community  Renewal 876 

Arizona  Cable  Television  Association,  Susan  Bitter  Smith  1335 

Amdt,   Aurel   M.,   National   League   of  Cities,   et   al;   and   Lehigh  County 

Authority 979 

Associated  Builders  &  Contractors,  Inc.: 

Robert  Permison  and  Bernard  Leibtag 427 

Don  Owen 1547 

Associated  General  Contractors  of  America,  Robert  J.  Desjardins 

July  13,  1993  1030 

September  21,  1993  1553 

Association  of  American  Railroads,  Edwin  L.  Harner  514 

Association  of  Christian  Schools  International,  Jonn  C.  Holmes  1082 

Association  of  Independent  Colleges  of  Art  and  Design,  Fred  Lazarus  IV  1103 

Association  of  Local  Housing  Finance  Agencies,  Stephen  G.  Leeper  887 

Association  of  National  Advertisers,  Inc.,  Dewitt  F.  Helm,  Jr  1184 

Bacchus,  Hon.  Jim,  a  Representative  in  Congress  from  the  State  of  Florida  ....  989 

Baptist  Foundation  of  Oklahoma,  James  H.  Lockhart  1768 

Barlow,  Hon.  Thomas  J.  Ill,  a  Representative  in  Congress  from  the  State 

of  Kentucky 1598 

Bartsch,  Charles,  Northeast  Midwest  Institute  840 

Battle  Fowler  Uw  Offices,  Richard  L.  OToole  227 

Beard,  E.  Lee,  Business  Women's  GolPLink,  and  First  Federal  Savings  1325 

Bechtel  Construction  Co.,  Michael  E.  Martello  1043 

Berman,  Hon.  Howard  L.,  a  Representative  in  Congress  from  the  State  of 

California  100 

Bloch,  Robert  A.,  Gordonsville,  Va  794 

Borton,    Pamela    K.,    Council    for   Rural    Housing   and    Development,    and 

Southwind  Management  Company 902 

Bouldin,  Kenneth  A.,  CDLA  Computer  Leasing  &  Remarketing  Association  ....  272 
Bretagne  Corp.,  Virginia  Lazenby: 

June  24,  1993  691 

September  8,  1993  1242 

Bristol  Savings  Bank  of  Connecticut,  Edward  P.  Lorenson  562 

Brooklyn  Union  Gas  Co.,  Fred  J.  Gentile  1632 

Bryn  Awel  Corp.,  Gerald  J.  Herr 1558 

Buford,  Shamia  "Tab,"  City  National  Bank  of  Newark  233 

Building  Owners  &  Managers  Association  International: 

James  C.  Dinegar  1738 

Thomas  B.  McChesney  254 

Bunning,  Hon.  Jim,  a  Representative  in  Congress  from  the  State  of  Kentucky  1595 

Business  Women's  GolPLink,  E.  Lee  Beard  1325 

Cahan,  Cora,  New  42nd  Street,  Inc  361 

California  Association  of  Winegrape  Growers,  Robert  P.  Hartzell  1648 

California  Carrot  Board,  John  Guerard 1662 

California  League  of  Savings  Institutions,  Henry  W.  Schmidt,  Jr 1309 

California  Pistachio  Commission,  Joseph  C.  Macllvarne  1655 

California  Water  Service  Co.,  Donald  L.  Houck 132 

Callihan,  Hon.  C.  Michael,  Lieutenant  Governor  of  Colorado;  and  Aerospace 
States  Association,  as  presented  by  Hon.  Joel  Hefley,  a  Representative 

in  Congress  from  Colorado  865 

Campbell,  Robert  H.,  Independent  Refiners  Coalition,  and  Sun  Co.,  Inc  1229 

Capon,  Ross,  Nationsd  Association  of  Railroad  Passengers  518 

Carbonic  Industries  Corp.,  J.  Vernon  Hinely  1760 

CDLA  Computer  Leasing  &  Remarketing  Association,  Kenneth  A.  Bouldin  272 

Central  State  Life  Insurance  Co.,  Virginia  Kirkland  Shehee  158 

Chemical  Manufacturers  Association,  Thomas  G.  Singley 1472 

Chicago  Title  &  Trust  Co.,  B.  Wyckliffe  Pattishall  1673 

Chicago,  City  of,  Hon.  Richard  M.  Daley,  Mayor 830 


V 

Page 

Cianbro  Corp.,  Robert  J.  Desjardins: 

July  13,  1993  1030 

September  21,  1993  1553 

City  National  Bank  of  Newark,  Shamia  'Tab"  Buford  233 

Cleveland-Cliffs,  Inc.,  John  L.  Kelly  1275 

Coalition  for  Asset  Backed  Securities,  Donald  B.  Susswein  214 

Coalition  for  the  Fair  Treatment  of  Environmental  Cleanup  Costs,  Wajrne 

Robinson 1626 

Coalition  on  Energy  Taxes,  R.  David  Damron  1254 

Coalition  to   Elinunate   Tax   Barriers   to  Environmental   Cleanup,   Fred  J. 

Gentile 1632 

Coalition  to  Preserve  the  Current  Deductibility  of  Environmental  Remedi- 
ation Costs,  Roy  E.  Hock  1604 

Cohber  Press,  Inc.,  Howard  C.  Webber,  Jr 1209 

Cohen,  Sheldon  S.,  Leadership  Council  on  Advertising  Issues 1192 

Colorado,  State  of  (see  listing  for  Hon.  C.  Michael  Callihan) 

Commercial  Finance  Association,  Louis  Eliasberg,  Jr 201 

Conmiittee  for  Competition  Through  Advertising,  Gerald  Z.  Gibian  1164 

Community  Bankers  Association  of  Illinois,  David  E.  Manning  208 

Computer     &     Business     Equipment     Manufacturers     Association,     Robert 

Mattson  645 

Conference  of  Chief  Justices,  and  Conference  of  State  Court  Administrators, 

Hon.  Thomas  R.  Phillips,  Chief  Justice 71 

Construction  Financial  Management  Association,  Gerald  J.  Herr 1558 

Contos,   Larry,  National  Grocers  Association,  and  Pay  Less  Supermarkets, 

Inc 523 

Coopers  &  Lybrand,  Ronald  T.  Maheu  1754 

Comeel,  Frederic  G.,  Sullivan  &  Worcester  479 

Costello,  Hon.  Jerry  F.,  a  Representative  in   Congress  from  the  State  of 

Illinois  64 

Council  for  Rural  Housing  and  Development,  Pamela  K.  Borton  902 

Cox,  Dale,  Independent  Bakers  Association  1094 

Crispin,  Robert  W.,  Travelers  Corp 180 

Crop  Protection  Coalition,  Richard  Douglas 1745 

Dakin,  William  G.,  National  Association  of  Manufacturers,  and  Mobil  Corp  ....  1431 

Daley,  Hon.  Richard  M.,  Mayor,  City  of  Chicago  830 

Damron,  R.  David,  Petrochemical  Energy  Group,  Coalition  on  Energy  Taxes, 

and  Hoechst  Celanese  Corp 1254 

DeFazio,  Hon.  Peter  A.,  a  Representative  in  Congress   from  the  State  of 

Oregon  59 

Desjardins,    Robert   J.,    Associated    General    Contractors    of  America,    and 

Cianbro  Corp.: 

July  13,  1993  1030 

September  21,  1993  1553 

Destec  Energy,  Inc.,  Tom  Remar 677 

Dinegar,  James  C,  Building  Owners  &  Managers  Association  International  ...  1738 

Disabled  American  Veterans,  John  F.  Heilman  120 

Douglas,  Richard,  Crop  Protection  Coalition,  and  Sun-Diamond  Growers  of 

California  1745 

Dyer,  Randy  (see  listing  for  National  Structured  Settlement  Trade  Associa- 
tion) 

Education  Finance  Council,  Lawrence  W.  OToole  1136 

Ege,  Karl  J.,  Frank  Russell  Co.  and  Frank  Russell  Investment  Management 

Co 593 

Electronic  Industries  Association,  Peter  F.  McCloskey: 

July  13,  1993  622 

September  21,  1993  1464 

Eliasberg,  Louis,  Jr.,  Commercial  Finance  Association,  and  Finance  Company 

of  America 201 

Elliott,  Gary,  National  Wood  Energy  Association  751 

Emergency  Committee  for  American  Trade,  Raymond  J.  Wiacek 1528 

Emil  Buehler  Perpetual  Trust,  Ira  J.  Kaltman 420 

Erlandson,  Dawn,  Friends  of  the  Earth 1294 

Estee  Lauder  Co.,  Gerald  Z.  Gibian  1164 

Farren,  Michael  J.,  Xerox  Corp  631 

Fay,  Kevin  J.,  Alliance  for  Responsible  CFC  Policy  1709 

Feeney,  David  L.,  National  Retail  Federation,  and  R.H.  Macy  &  Co.,  Inc  1203 


VI 

Page 
Feulner,  Edwin  J.,  Jr.  {see  listing  for  Heritage  Foundation) 

Finance  Company  of  America,  Louis  Eliasberg,  Jr 201 

Fink,  Matthew  P.,  Investment  Company  Institute 572 

Firemen's  Association  of  the  State  of  New  York,  Kenneth  E.  Newton  ..!!".***...il  105 

First  Colony  Life  Insurance  Co.,  Andrew  Larsen 174 

First  Federal  Savings,  E.  Lee  Beard 1325 

Florida  Clinical  Practice  Association,  Inc.,  Stanley  W.  Rosenkranz  ................."  1106 

Florida  Farm  Bureau  Casualty  Insurance  Co.,  Robert  Jarratt 1488 

Florida  Farm  Bureau  General  Insurance  Co.,  Robert  Jarratt  .....".  1488 

Forest  Industries  Council  on  Taxation,  Bartow  S.  Shaw,  Jr 682 

Frank  Russell  Co.,  and  Frank  Russell  Investment  Management  Co.,  Karl 

J.  Ege,  and  Warren  Thompson 593 

Friends  of  the  Earth,  Dawn  Erlandson  1284 

FSC  Software  Coalition,  Gen.  James  A.  Abrahamson 638 

Gackenbach,  Julie  Leigh,  U.S.  Chamber  of  Commerce  I444 

GenCorp,  Wayne  Robinson  1626 

General  Dynamics  Corp.,  Douglas  C.  McPherson  668 

General  Motors  Corp.,  G.  Mustafa  Mohatarem 262 

Gentile,  Fred  J.,  Coalition  to  Eliminate  Tax  Barriers  to  Environmental  Clean- 
up, and  Brooklyn  Union  Gas  Co  1632 

Gentile,  Peter  A.,  North  American  Reinsurance  Corp  1480 

Geothermal  Resources  Association,  Thomas  C.  Hinnchs  766 

Gibian,  Gerald  Z.,  Estee  Lauder  Co.,  and  Committee  for  Competition  Through 

Advertising 1164 

Gill,  Charles  B.,  National  Rural  Utilities  Cooperative  Finance  Corp  1346 

Girard,  William  C.  "Chris,"  National  Association  of  Convenience  Stores,  and 

Plaid  Pantries  538 

Glunt,  Roger  C,  (see  listing  for  National  Association  of  Home  Builders) 

Golden  State  Mutual  Life  Insurance  Co.,  Laricin  Teasley  187 

Graphic  Arts  Legislative  Council,  Howard  C.  Webber,  Jr  1209 

Great  Western  Financial   Corp.,  Michael  Palko  (see  listing  for  Savings  & 
Community  Bankers  of  America) 

Green,  Robert  H.,  National  Foreign  Trade  Council,  Inc 1507 

Gregg.  Robert  S.,  Sequent  Computer  Systems,  Inc  389 

GrilTm,  James  T.,  John  D.  and  Catherine  T.  MacArthur  Foundation  402 

Grubb  &  Ellis  Co.,  Thomas  B.  McChesney 254 

Guerard,  John,  California  Carrot  Board,  and  Wm.  Bolthouse  Farms,  Inc  1662 

Hamrick,  Stephen  H.,  Investment  Program  Association,  and  PaineWebber 

Inc 496 

Harman,  Hon.  Jane,  a  Representative  in  Congress  from  the  State  of  Califor- 
nia    1073 

Harper,  Edwin  L.,  Association  of  American  Railroads  514 

Hartzell,  Robert  P.,  California  Association  of  Winegrape  Growers  1648 

Hecht,  Marjorie  Mazel,  21st  Century  Science  &  Technology  1730 

Hefley,  Hon.  Joel,  a  Representative  in  Congress  from  the  State  of  Colorado 
(see  listing  for  Hon.  C.  Michael  Callihan) 

Heilman,  John  F.,  Disabled  American  Veterans 120 

Helm,  Dewitt  F.,  Jr.,  Advertising  Tax  Coalition,  and  Association  of  National 

Advertisers,  Inc  1184' 

Henderson,  Robert  E.,  South  Carolina  Research  Authority 973 

Heritage  Foundation,  William  J.  Lehrfeld  (on  behalf  of  Edwin  J.  FauLaer, 

Jr.)  1331 

Herr,  Gerald  J.,  Construction  Financial  Management  Association,  and  Bryn 

Awel  Corp  1558 

Hinely,  J.  Vernon,  Carbonic  Industries  Corp  1760 

Hinrichs,  Thomais  C,  Geothermal  Resources  Association,  and  Magma  Power 

Co 766 

Hock,  Rov  E.,  Coalition  to  Preserve  Deductibility  of  Environmental  Remedi- 
ation Costs,  and  Technitrol,  Inc  1604 

Hoechst  Celanese  Corp.,  R.  David  Damron 1254 

Holmes,  John  C,  Association  of  Christian  Schools  International  1082 

Home  Health  Services  and  Stafiing  Association,  James  C.  Pyles  1574 

Hood,  John  A.,  National  Assisted  Management  Association,  and  Volunteers 

of  America  940 

Horn,  Hon.  Stephen,  a  Representative  in  Congress  from  the  State  of  Califor- 
nia    1074 

Houck,  Donedd  L.,  National  Association  of  Water  Cos.,  and  California  Water 

Service  Co  132 


VII 

Page 

Housing,  Urban  Redevelopment  Authority  of  Pittsburgh,  Stephen  G.  Leeper  ...  887 

Hughes,  Vester  T.,  Jr.,  Hughes  &  Luce  126 

Hyman,  Morton  P.,  International  Shipholding  Corp.;  Overseas  Shipholding 

Group,  Inc.;  and  OMI  Corp  660 

IBM  Corp.,  Robert  Mattson  645 

Independent  Bakers  Association,  Dale  Cox  1094 

Independent  Petroleum  Association  of  America,  Vii^nia  Lazenby: 

June  24,  1993  691 

September  8,  1993  1242 

Independent  Refiners  Coalition,  Robert  H.  Campbell  1229 

International  Shipholding  Corp.,  Morton  P.  Hyman  660 

Investment  Company  Institute,  Matthew  P.  Fink  572 

Investment  Program  Association,  Stephen  H.  Hamrick,  and  Bruce  H.  Vincent  496 

IRECO  IncTDyno  Nobel  Inc.,  David  G.  Millett  527 

Itel  Corp.,  James  E.  Knox  585 

Izaak  Walton  League  of  America,  Maitland  Sharpe  798 

Jarratt,  Robert,  National  Association  of  Independent  Insurers,  Alliance  of 

American  Insurers,  National  Association  of  Mutual  Insurance  Companies, 

Florida  Farm  Bureau  Casualty  Insurance  Co.,  and  Florida  Farm  Bureau 

General  Insurance  Co  1488 

Jefferson,  Hon.   William  J.,   a  Representative  in  Congress  from  the  State 

of  Louisiana  58 

Jemigan,   ClifF,   Semiconductor  Industry  Association,    and  Advanced  Micro 

Devices  265 

John  D.  and  Catherine  T.  MacArthur  Foundation,  James  T.  Griffin  402 

Johnson,  Hon.  Nancy  L.,  a  Representative  in  Congress  from  the  State  of 

Connecticut  41 

Johnson,  Stephen  F.,  American  Public  Power  Association,  and  Washington 

Public  Utility  Districts' Association  770 

Joseph,  Rachel  A.,  National  Congress  of  American  Indians  557 

Jung,  Paul,  Student  Loan  Interest  Deduction  Restoration  Coalition 1016 

Kabsh,  Mark,  National  Association  of  Home  Builders  1436 

Kaltman,  Ira  J.,  Emil  Buehler  Perpetual  Trust 420 

Kaman  Corp.,  Glenn  M.  Messemer  277 

Kelly,  John  L.,  American  Iron  Ore  Association  and  Cleveland-ClifTs,  Inc  1275 

Kern,   Lynda  A.,  American  Bankers  Association,  Taxation  Committee;  and 

AmSouth  Bank  N.A  192 

Kies,  Kenneth  J.,  North  American  Reinsurance  Corp  1480 

Kilpatrick  Life  Insurance  Co.,  Virginia  Kilpatrick  Shehee  158 

Kleczka,  Hon.  Gerald  D.,  a  Representative  in  Congress  from  the  State  of 

Wisconsin  1372 

Kmart  Corp.,  James  P.  Sheridan  258 

Knox,  James  E.,  Itel  Corp  585 

Land  Insurance  Title  Co.,  Irving  Morgenroth  1037 

Lange,  Robert  T.,  Malvern,  Pa  811 

Larsen,  Andrew,  National  Structured  Settlement  Trade  Association,  and  First 

Colony  Life  Insurance  Co  174 

Lazarus,  Fred,  FV,  Association  of  Independent  Colleges  of  Art  and  Design  1103 

Lazenbv,  Virginia: 

Independent  Petroleum  Association  of  America,  and  Bretagne  Corp  691 

Independent   Petroleum   Association   of  America,    Bretagne   Corp.,    and 

National  Stripper  Well  Association  1242 

Leadership  Council  on  Advertising  Issues,  Sheldon  S.  Cohen 1192 

Lee,  John  W.,  College  of  William  and  Mary,  Marshall-Wythe  School  of  Law  ....  1687 
Leeper,  Stephen   G.,  Association  of  Local   Housing  Finance  Agencies;  and 

Housing,  Urban  Redevelopment  Authority  of  Pittsburgh 887 

Lehigh  County  Authority,  Aurel  M.  Amdt  979 

Lehman  Brothers,  Inc.,  K.  Fenn  Putnam  954 

Lehrfeld,  William  J.,  Heritage  Foundation  1331 

Leibtag,  Bernard,  Associated  Builders  &  Contractors,  Inc  427 

Levin,  Hon.  Sander  M.,  a  Representative  in  Congress  from  the  State  of 

Michigan  30 

Levine,  Howard  J.,  Roberts  &.  Holland  1680 

Lewis,  Terry,  National  Association  of  Housing  Cooperatives  947 

Lockhart,  James  H.,  Baptist  Foundation  of  Oklahoma  1768 

Longsworth,  Nellie  L.,  Preservation  Action  929 

Lorenson,  Edward  P.,  Savings  &  Community  Bankers  of  America,  and  Bristol 

Savings  Bank  of  Connecticut  562 


VIII 

Page 

Louisiana  Insurers'  Conference,  Virginia  Kilpatrick  Shehee  158 

Lovain,  Timothy,  Trade  Taxes  Group  507 

Macllvaine,  Joseph  C,  Western  Growers  Association,  Western  Pistachio  Asso- 
ciation, California  Pistachio  Commission,  and  Paramount  Farming  Co  1655 

MAERP  Reinsurance  Association,  Robert  Rahn  1500 

Magill,  James  N.,  Veterans  of  Foreign  Wars  of  the  United  States  123 

Magma  Power  Co.,  Thomas  C.  Hinrichs  766 

Maheu,  Ronald  T.,  Coopers  &  Lybrand 1754 

Mangis,  Jon  A.,  Oregon  Department  of  Veterans'  Affairs  , 990 

Manning,  David  E.,  Community  Bankers  Association  of  Illinois  208 

Martell,  James  G.,  Prime  Group,  Inc  838 

Martello,  Michael  E.,  National  Constructors  Association,  and  Bechtel  Con- 
struction Co  1043 

Marvin,  Michael  L.,  American  Wind  Energy  Association  756 

Mattson,  Robert,  Computer  &  Business  Equipment  Manufacturers  Associa- 
tion, and  IBM  Cons  645 

Mayer,  Matthew,  Times  Square  Center  Associates,  and  Park  Tower  Realty 

Corp  362 

McChesney,  Thomas  B.,   Building  Owners  &  Managers  Association  Inter- 
national, and  Grubb  &  Ellis  Co  254 

McClendon,  Charles,  American  Football  Coaches  Association  91 

McCloskey,  Peter  F.,  Electronic  Industries  Association: 

June  24,  1993  622 

September  21,  1993  1464 

McConaghy,  Mark,  Ad  Hoc  Group  to  Preserve  Deduction  for  Advertising 1171 

McPherson,    Douglas    C,    Aerospace    Industries    Association,    and    General 

Dynamics  Corp  668 

Merlis,  Edward,  Air  Transport  Association  of  America 1303 

Merrill  Lynch  &  Co.,  Inc.,  LaBrenda  Garrett  Stodghill  580 

Merrill,  Peter,  U.S.  Multinational  Corporation  Tax  Policy  Coalition  1516 

Messemer,  Glenn  M.,  Kaman  Corp  277 

Metzger,  Philip  C,  New  York  State  Office  of  Federal  Affairs  788 

Michigan  State  Hospital  Finance  Authority,  and  Michigan  Higher  Education 

Facilities  Authority,  Roy  A.  Pentilla  966 

Millett,  David  G.,  IRECO  Inc/Dyno  Nobel  Inc  527 

Mineral  Resources  Alliance,  Stephen  D.  Alfers 1265 

Mobil  Corp.,  William  G.  Dakin  1431 

Mohatarem,  G.  Mustafa,  General  Motors  Corp 262 

Montgomery,  Hon.  G.V.  (Sonny),  Chairman,  Committee  on  Veterans'  Affairs, 

anda  Representative  in  Congress  from  the  State  of  Mississippi  46 

Morgenroth,  Irving,  American  Land  Title  Association,  and  Land  Insurance 

Title  Co  1037 

Mutual  Atomic  Energy  Liability  Underwriters,  Robert  Rahn  

National  Assisted  Management  Association,  John  A.  Hood  940 

National    Association    of    Computer    Consultant    Businesses,    Harvey    J. 

Shulman  110 

National  Association  of  Convenience  Stores,  William  C.  "Chris"  Girard 538 

National  Association  of  Home  Builders: 

J.  Leon  Peace,  Jr.  (on  behalf  of  Roger  C.  Glunt) 893 

Mark  Kalish  (on  behalf  of  Thomas  N.  Thompson) 1436 

National  Association  of  Housing  Cooperatives,  Terry  Lewis  947 

National  Association  of  Independent  Insurers,  Robert  Jarratt  1488 

National  Association  of  Manufacturers,  William  G.  Dakin 1431 

National  Association  of  Mutual  Insurance  Cos.,  Robert  Jarratt  1488 

National  Association  of  Railroad  Passengers,  Ross  Capon  518 

National  Association  of  Water  Cos.,  Donald  L.  Houck 132 

National  Congress  of  American  Indians,  Rachel  A.  Joseph  557 

National  Constructors  Association,  Michael  E.  Martello  1043 

National  Council  of  Health  Facilities  Finance  Authorities,  Roy  A.  Pentilla  966 

National  Council  of  State  Housing  Agencies,  Angelo  J.  Aponte  876 

National  Foreign  Trade  Council,  Inc.,  Robert  H.  Green 1507 

National  Grocers  Association,  Larry  Contos  523 

National  Insurance  Association,  Laricin  Teasley  187 

National  League  of  Cities,  et  al,  Aurel  M.  Amdt 979 

National  ResXtv  Committee: 

Stefan  F.  Tucker 1668 

William  C.  Rudin  247 


IX 

Page 

National  Retail  Federation: 

David  L.  Feeney 1203 

James  P.  Sheridan  258 

National  Rural  Utilities  Cooperative  Finance  Corp.,  Charles  B.  Gill  1346 

National  Staff  Network,  Marvin  R.  Selter 100 

National  Stripper  Well  Association,  Virginia  Lsizenby 1242 

National  Structured  Settlement  Trade  Association  (Andrew  Larsen  on  behalf 

of  Randy  Dyer)  174 

National  Trust  for  Historic  Preservation,  Hany  K.  Schwartz 918 

National  Volunteer  Fire  Council,  Kenneth  E.  Newton 105 

National  Wood  Energy  Association,  Gary  Elliott 751 

Native  American  Affairs,  Subcommittee  on,  Committee  on  Natural  Resources, 
Hon.  Bill  Richardson,  Chairman,  and  a  Representative  in  Congress  from 

the  State  of  New  Mexico 292 

Navajo  Nation,  Faith  R.  Roessel  549 

New  42nd  Street,  Inc.,  Cora  Cahan 361 

New  England  Education  Loan  Marketing  Corp.,  Lawrence  W.  OToole  1136 

New  York  State  Division  of  Housing  and  Community  Renewal,  Angelo  J. 

Aponte  876 

New  York  State  oflice  of  Federal  Affairs,  Philip  C.  Metzger  788 

Newspaper  Association  of  America,  Timothy  White  1179 

Newton,  Kenneth  E.,  Firemen's  Association  of  the  State  of  New  York,  and 

National  Volunteer  Fire  Council  105 

North  American  Reinsurance  Corp.,  Peter  A.  Gentile  and  Kenneth  J.  Kies  1480 

Northeast  Midwest  Institute,  Charles  Bartsch  840 

NPES  The  Association  for  Suppliers  of  Printing  &  Publishing  Technologies, 

Mark  J.  Nuzzaco  1215 

Nurse  Brokers  and  Contractors  of  America,  Sally  Sumner  1566 

Nuzzaco,  Mark  J.,  NPES  The  Association  for  Suppliers  of  Printing  &  Publish- 
ing Technologies  1215 

O'Connor,  Edward  A.,  Jr.,  Spaceport  Florida  Authority  998 

O'Connor,  James  E.,  Savings  ana  Community  Bankers  of  America  1316 

OToole,  Lawrence  W.,  New  England  Education  Loan  Marketing  Corp.,  and 

Education  Finance  Council  1136 

OToole,  Richard  L.,  Battle  Fowler  Law  Offices  227 

OMI  Corp.,  Morton  P.  Hyman  660 

Ono,  Rutn  M.,  Queen  Emma  Foundation  414 

Oracle  Corp.,  Gen.  James  A.  Abrahamson  638 

Oregon  Department  of  Veterans'  Affairs,  Jon  A.  Mangis  990 

Overseas  Shipholding  Group,  Inc.,  Morton  P.  Hyman  660 

Owen,  Don  Associated  Builders  &  Contractors,  Inc.,  and  P&P  Contractors  1547 

P&P  Contractors,  Don  Owen  1547 

Padwe,  Gerald  W.,  American  Institute  of  Certified  Public  Accountants  466 

PaineWebber  Inc.,  Stephen  H.  Hamrick  496 

Palko,  Michael,  Great  Western  Financial  Corp.  (see  listing  for  Savings  & 
Community  Bankers  of  America) 

Paramount  Farming  Co.,  Joseph  C.  Macllvaine  1655 

Park  Tower  Realty  Corp.,  Matthew  Mayer  362 

Pattishall,  B.  Wyckliffe,  Chicaeo  Title  &  Trust  Co  1673 

Pay  Less  Supermarkets,  Inc.,  Larry  Contos  523 

Peace,  J.  Leon,  Jr.,  National  Association  of  Home  Builders  (see  listing  for 
Roger  C.  Glunt) 

Pecarich,  Pamela  J.,  American  Institute  of  Certified  Public  Accountants 1454 

Pennell,  Jeffrey  N.,  Emory  University  School  of  Law  1776 

Pentilla,  Roy  A.,  National  Council  of  Health  Facilities  Finance  Authorities, 
Michigan  State  Hospital  Finance  Authority,  and  Michigan  Higher  Edu- 
cation Facilities  Authority 966 

Permison,  Robert,  Associated  Builders  &  Contractors,  Inc  427 

Petrochemical  Energy  Group,  R.  David  Damron  1254 

PHH  Corp.,  Samuel  H.  Wright  1089 

Phillips,  Hon.  Thomas  R.,  Chief  Justice,  Supreme  Court  of  Texas;  Joint  Task 
Force  on  Judicial  Pension  Plans;  Conference  of  Chief  Justices;  and  Con- 
ference of  State  Court  Administrators  71 

Plaid  Pantries,  WilUam  C.  "Chris"  Girard  538 

PPG  Industries,  Inc.,  Donna  Lee  Walker  154 

Preservation  Action,  Nellie  L.  Longsworth  929 

Prime  Group,  Inc.,  James  G.  Martell  838 

Printing  Industries  of  America,  Howard  C.  Webber,  Jr  1209 


X 

Page 

Public  Securities  Association,  R.  Fenn  Putman,  and  Lehman  Brothers,  Inc  954 

Pyles,  James  C,  Home  Health  Services  and  Stafllng  Association  1574 

Queen  Enama  Foundation,  Ruth  M.  Ono  414 

R.H.  Macy  &  Co.,  Inc.,  David  L.  Feeney 1203 

R.R.  Donnelley  &  Sons  Co.,  Frank  Uvena  1148 

Rahn,  Robert,  American  Nuclear  Insurers,  American  Insurance  Association, 
Mutual  Atomic  Energy  Liability  Underwriters,  and  MAERP  Reinsurance 

Association  1500 

Ray,  Cecil  A.,  Jr.,  State  Bar  of  Texas,  Section  of  Taxation  814 

Remar,  Tom,  WMX  Technology  &  Services;  Teco  Energy,  Inc.,  and  Destec 

Energy,  Inc  677 

Renewable  Fuels  Association,  Eric  Vaughn  741 

Reynolds,  Hon.  Mel,  a  Representative  in  Congress  from  the  State  of  Dlinois  ....  857 
Richardson,  Hon.  Bill,  Chairman,  Subcommittee  on  Native  American  Affairs, 
Committee  on  Natural  Resources,  and  a  Representative  in  Congress  from 

the  State  of  New  Mexico  292 

Robert  Mondavi  Winery,  Herbert  Schmidt  141 

Robinson,  Wayne,  CoaUtion  for  the  Fair  Treatment  of  Environmental  Cleanup 

Costs 1626 

Roessel,  Faith  R.,  Navajo  Nation  549 

Romeo,  Richard  P.,  American  Financial  Services  Association,  and  American 

Express  Travel  Related  Services  Co  1153 

Rose,  Jordan  P.,  American  Bar  Association,  Section  of  Tjixation,  Committee 

on  S  Corporations 434 

Rosenkranz,  Stanley  W.,  Florida  Clinical  Practice  Association,  UniversiW  of 
Florida  Agency  Funds,  and  University  of  South  Florida  College  of  Medi- 
cine's Faculty  Practice  Plan  1106 

Roybal-AUard,  Hon.   Lucille,  a  Representative  in  Congress  from  the  State 

of  California  1072 

Rudin,  William  C,  National  Realty  Committee,  and  Rudin  Management  Co  ...  247 

Sanner,  Harvey  Joe,  American  Agriculture  Movement,  Inc  1740 

Savings  &  Community  Bankers  of  America: 

Edward  P.  Lorenson  562 

James  E.  O'Connor  (on  behalf  of  Michael  Palko) 1316 

Schmidt,  Henry  W.,  Jr.  California  League  of  Savings  Institutions  1309 

Schmidt,    Herbert,    American   Vintners    Association,    and   Robert   Mondavi 

Winery 141 

Schumer,  Hon.   Charles  E.,   a  Representative  in  Congress   from  the  State 

of  New  York  859 

Schwartz,  Harry  K.,  National  Trust  for  Historic  Preservation 918 

Screen  Actors  Guild,  Ron  Silver,  and  Mark  Weinstein  1121 

Selter,  Marvin  R.,  National  Staff  Network 100 

Semiconductor  Industry  Association,  Cliff  Jemigan 265 

Semiconductor  Research  Corp.,  Larry  W.  Sumney  371 

Sequent  Computer  Systems,  Inc.,  Robert  S.  Greg^  389 

Sharpe,  Maitland,  Izaak  Walton  League  of  America 798 

Shaw,  Bartow  S.,  Forest  Industries  Council  on  Taxation  682 

Shaw,  Hon.  E.  Clay,  Jr.,  a  Representative  in  Congress  from  the  State  of 

Florida 35 

Shehee,  Virginia  Kilpatrick,  Louisiana  Insurers'  Conference,  Kilpatrick  Life 

Insurance,  and  Central  State  Life  Insurance  Co 158 

SheU  Oil  Co.,  Thomas  G.  Singley  1472 

Sheridan,  James  P.,  National  Retail  Federation,  and  Kmart  Corp 258 

Shulman,     Harvey     J.,     National     Association     of    Computer     Consultant 

Businesses 110 

Silver,  Ron,  Actors'  Equity  Association,  and  Screen  Actors  Guild,  and  Amer- 
ican Federation  of  Television  &  Radio  Artists 1121 

Singley,  Thomas  G.,  Chemical  Manufacturers  Association  and  Shell  Oil  Co  1472 

Sklar,  Scott,  Solar  Energy  Industries  Association  706 

Smith,  Anthony  L.,  Southern  California  Edison  Co.,  et  al  733 

Smith,  Donald  David,  Western  Commercial  Space  Center  1005 

Smith,  Hon.  Nick,  a  Representative  in  Congress  from  the  State  of  Michigan  ...  82 
Smith,  Susan  Bitter,  Arizona  Cable  Television  Association,  and  American 

Society  of  Association  Executives  1335 

Solar  Energy  Industries  Association,  Scott  Sklar  706 

Solomon,  Michael  F.,  Irvins,  Phillips  &  Barker  1614 

South  Carolina  Research  Authority,  Robert  E.  Henderson 973 

Southern  California  Edison  Co.,  et  al,  Anthony  L.  Smith 733 


XI 

Page 

Southwind  Management  Company,  Pamela  K.  Borton  902 

Spaceport  Florida  Authority,  Edward  A.  O'Connor,  Jr  998 

Stodffhill,  LaBrenda  Garrett,  Merrill  Lynch  &  Co.,  Inc  580 

Strickland,  Hon.  Ted,  a  Representative  in  Congress  from  the  State  of  Ohio  871 

Studds,  Hon.   Gerry  E.,   a  Representative   in   Congress   from  the  State  of 

Massachusetts  49 

Student  Loan  Interest  Deduction  Restoration  Coalition,  Paul  Jung 1016 

Sullivan  &  Worcester,  Frederic  G.  Comeel  479 

Sumner,  Sally,  Nurse  Brokers  and  Contractors  of  America  1566 

Sunmey,  Larry  W.,  Alliance  for  Collaborative  Research,  and  Semiconductor 

Research  Corp  371 

Sun  Co.,  Inc.,  Robert  H.  Campbell  1129 

Sun-Diamond  Growers  of  California,  Richard  Doiiglas  1745 

Susswein,  Donald  B.,  Coalition  for  Asset  Backed  &curitie8  214 

Swift  Energy  Co.,  Bruce  H.  Vincent 496 

Teasley,  Larkin,  National  Insurance  Association,  and  Golden  State  Mutual 

Life  Insurance  Co  187 

Technitrol,  Inc.,  Roy  E.  Hock  1604 

Teco  Energy,  Inc.,  Tom  Remar  677 

Texas,  State  Bar  of.  Section  of  Taxation,  Cecil  A.  Ray,  Jr 814 

Texas,  Supreme  Court  of,  Hon.  Thomas  R.  Phillips,  Chief  Justice  71 

Thompson,  Edward,  Jr.,  American  Farmland  Trust 801 

Thompson,  Thomas  N.  (see  listing  for  National  Association  of  Home  Builders) 
Thompson,  Warren,  Frank  Russell  Co.,  and  Frank  Russell  Investment  Man- 
agement Co  593 

Times  Square  Center  Associates,  Matthew  Mayer  and  Dale  W.  Wickham  362 

Times  Union,  Timothy  White  1179 

Torricelli,  Hon.  Robert  G.,  a  Representative  in  Congress  from  the  State  of 

New  Jersey  52 

Trade  Taxes  Group,  Timothy  Lovain  507 

Travelers  Corp.,  Robert  W.  Crispin  180 

Tucker,  Hon.  Walter  R.  Ill,  a  Representative  in  Congress  from  the  State 

of  California  1057 

Tucker,  Stefan  F.,  National  Realty  Committee  1668 

Twenty-First  (21st)  Century  Science  &  Technology,  Marjorie  Mazel  Hecht  1730 

U.S.  Chamber  of  Commerce,  Julie  Leigh  Gackenbach  1444 

U.S.  Multinational  Corporation  Tax  Policy  Coalition,  Peter  Merrill  1516 

Uvena,  Frank,  R.R.  Donnelley  &  Sons  Co  1148 

Vaughn,  Eric,  Renewable  Fuels  Association  741 

Veterans  of  Foreign  Wars  of  the  United  States,  James  N.  Magill  123 

Veterans'  AfTaris,  Committee,  Hon.  G.V.  (Sonny)  Montgomery,  and  a  Rep- 
resentative in  Congress  from  the  State  of  Mississippi  46 

Vincent,  Bruce  H.,  Investment  Program  Association,  and  Swift  Enei^  Co  496 

Volunteers  of  America,  John  A.  Hood  940 

Walker,  Donna  Lee,  PPG  Industries,  Inc  154 

Washington  Public  Utility  Districts'  Association,  Stephen  F.  Johnson 770 

Waters,  Hon.  Maxine,  a  Representative  in  Congress  from  the  State  of  Califor- 
nia    1075 

Webber,  Howard  C,  Jr.,  Printing  Industries  of  America,  Graphic  Arts  Legisla- 
tive Council,  and  Cohber  Press,  Inc  1209 

Weinstein,  Mark  J.,  Screen  Actors  Guild,  American  Federation  of  Television 

and  Radio  Artists,  Actors'  Equity  Association  1121 

Western  Commercial  Space  Center,  Donald  David  Smith  1005 

Western  Growers  Association,  Joseph  C.  MacFlvaine  1655 

Western  Pistachio  Association,  Joseph  C.  Macllvaine 1655 

Wheat,  Hon.  Alan,  a  Representative  in  Congress  from  the  State  of  Missouri  ...  1384 
White,  Timothy,  Times  Union,  Advertising  Tax  Coalition,  and  Newspaper 

Association  of  America 1179 

Wiacek,  Raymond  J.,  Emergency  Committee  for  American  Trade  1528 

Wickham,  Dale  W.,  Times  Square  Center  Associates 362 

Wm.  Bolthouse  Farms,  Inc.,  John  Guerard  1662 

WMX  Technology  &  Services,  Tom  Remar  677 

Wright,  Samuel  H.,  PHH  Corp  1089 

Xerox  Corp.,  Michael  J.  Farren  631 

Zimmerman,  Mary  Beth,  Alliance  to  Save  Energy  699 


SUBMISSIONS  FOR  THE  RECORD 
Listing  by  Subject— Revenue  Losers 

tax  accounting 

National  Association  of  Regulatory  Utility  Commissioners,  Linda  Bisson  Ste- 
vens, letter  and  attachments 1787 

FINANCIAL  INSTITUTIONS 

Associated  Bank,  NA,  Neenah,  Wis.,  Michael  B.  Mahlik,  letter 1792 

Bank  Securities  Association,  statement 1793 

Bank  South,  N.A.,  Atlanta,  Ga.,  J.  Blake  Young,  Jr.,  letter  1796 

Bamett  Banks  Trust  Co.,  N.A.,  Jacksonville,  Fla.,  Michael  C.  Baker,  letter 1797 

Commerce  Bancshares,  Inc.,  Kansas  City,  Mo.,  John  S.  Archer,  letter  1798 

First  Fidelity  Bank,  NA.,  Newark,  New  Jersey,  John  J.  Phillips,  letter  1799 

First  National  Bank  of  Chicago,  Michael  P.  Traba,  statement 1801 

First  Source  Bank,  South  Bend,  Ind.,  James  P.  Coleman,  letter  1804 

First  Trust  National  Association,  St.  Paul,  Minn.,  John  M.  Murphy,  Jr., 

letter 1805 

Hawaiian  Trust  Co.,  Ltd.,  Honolulu,  Hawaii,  Douglas  Philpotts,  letter 1807 

Independent  Bankers  Association  of  America,  James  R.  LaufTer,  statement 1809 

Investment  Co.  Institute,  statement  (see  listing  under  Multiple  Issues  head- 
ing) 

KPMG  Peat  Marwick,  New  York,  N.Y.,  Kathy  L.  Anderson,  letter  1811 

Magna  Trust  Co.,  Belleville,  111.,  Peter  C.  Merzian,  letter  1812 

Meridian  Asset  Management,  Inc.,  Valley  Forge,  Pa.,  Robert  C.  Williams, 

letter 1813 

Midlantic  National  Bank,  Edison,  NJ.,  AJ.  DiMatties,  letter 1814 

Northern  Trust  Co.,  Chicago,  111.,  Bany  G.  Hastings,  letter  1815 

Old  Kent  Bank  and  Trust  Co.,  Grand  Rapids,  Mich.,  E.  Philip  Farley,  letter  ...  1816 
Savings  Bank  Life  Insurance  Co.,  Wobum,  Mass.,  Robert  K.  Sheridan,  state- 
ment    1820 

Securities  Industry  Association,  Marc  E.  Lackritz,  statement  1823 

Security  Trust  Co.,  NA.,  Baltimore,  Md.,  Timothy  J.  Hynes  III,  letter  1817 

Texas  Commerce  Investment  Co.,  Houston,  Tex.: 

H.  Mitchell  Harper,  letter 1818 

William  0.  Leszinske,  letter  1819 

INSURANCE 

Association  of  Financial  Guaranty  Insurers,  William  A.  Geoghegan,  statement 
and  attachments 1837 

Canadian   Life   and  Health  Insurance  Association,  Raymond   L.   Britt,  Jr., 

and  Mary  V.  Harcar,  statement  1826 

Colonial  Life  &  Accident  Insurance  Co.,  Inc.,  Columbia,  S.C,  statement  and 

attachment 1844 

Mutual  of  America,  Daniel  W.  Coyne,  letter  1836 

PASS-THROUGH  ENTITIES 

Alcoma  Association,  Inc.,  Lake  Wales,  Fla.,  Lawrence  C.  Updike,  statement  ....  1858 

Arkansas  Electric  Cooperative  Corp.,  Carl  S.  Whillock,  letter  1870 

Florida  Bar,  Tax  Section,  Jerald  David  August,  statement  1849 

Griflin  Industries,  Inc.,  Cold  Spring,  Ky.,  Dennis  B.  GrifTm,  statement  1864 

(XII) 


XIII 

Page 

Investment  Co.  Institute,  statement  (see  listing  under  Multiple  Issues  head- 
ing) 

National  Rural  Electric  Cooperative  Association,  Bob  Bergland,  statement 1871 

Schnitzer  Investment  Corp.,  Portland,  Ore.,  Kenneth  M.  Novack,  statement  ...  1866 

Solo  Cup  Co.,  statement  1859 

Wells  Manufacturing  Co.,  statement  1862 

COST  RECOVERY 

American  Automobile  Manufacturers  Association,  statement  1883 

D'Agostino  Supermarkets,  Inc.,   Larchmont,  N.Y.,  Nicholas  D'Agostino,  Jr., 

letter 1885 

Delta  Queen  Steamboat  Co.,  New  Orleans,  La.,  statement  1876 

Kennelly,  Hon.  Barbara  B.,  a  Representative  in  Congress  from  the  State 

of  Connecticut,  statement  (see  listing  under  Multiple  Issues  heading) 
National  Association   for  the  Self-Employed,   Bennie   L.  Thayer,  letter  (see 

listing  under  Multiple  Issues  heading) 

New  York  Cruise  Lines,  Inc.,  August  J.  Ceradini,  Jr.,  letter 1879 

Passenger  Vessel  Association,  Eric  G.  Scharf,  letter  1880 

Sayville  Ferry,  Sayville,  N.Y.,  Ken  Stein,  Jr.,  letter  1882 

EMPLOYEE  BENEFITS 

AlliedSignal  Inc.,  Ronald  A.  Sinaikin,  statement  1908 

American  Legion,  Steve  A.  Robertson,  statement  1887 

Bedford  Countv  (Va.)  Circuit  Court,  Hon.  William  W.  Sweeney,  letter  (for- 
warded by  the  Hon.  L.F.  Payne,  a  Representative  in  Congress  from  the 

State  of  Virginia)  1896 

Chrysler  Corp.,  Robert  G.  Liberatore,  statement  and  attachment  1902 

Committee  oi  Annuity  Insurers,  statement  and  attachment  1898 

CrisaUi,  Donna  M.,  Washington,  D.C.,  statement 1889 

ESOP  Association: 

Statement  1901 

J.  Michael  Keeling,  statement  1906 

Illinois  Supreme  Court,  Hon.  Benjamin  K.  Miller,  Chief  Justice,  letter  and 

attachment 1893 

Investment  Co.  Institute,  statement  (see  listing  under  Multiple  Issues  head- 
ing) 

Kansas  City  Royals  Baseball,  Michael  E.  Herman,  statement  1385 

Kennelly,  Hon.   Barbara  B.,   a  Representative  in  Congress  from  the  State 

of  Connecticut,  statement  (see  listing  under  Multiple  Issues  heading) 
Non  Commissioned  Officers  Association  of  the  United  States  of  America, 

Larry  D.  Rhea  and  Michael  Ouelette,  statement  1913 

PPG  Industries,  Inc.,  Raymond  W.  LeBoeuf,  statement  1911 

Rahall,  Hon.  Nick  J.,  II,  a  Representative  in  Congress  from  the  State  of 

West  Virginia,  statement 1890 

Stump,  Hon.  Bob,  a  Representative  in  Congress  from  the  State  of  Arizona, 
letter  and  attachment  1892 

iNDivrouAL 

American  Dental  Association,  statement  and  attachment  1926 

American  Society  for  Payroll  Management,  Robert  D.  Williamson,  statement  ..  1917 

Associated  Builders  and  Contractors,  Inc.,  Charles  E.  Hawkins  III,  letter 1919 

Building  and  Construction  Trades  Department,  AFL-CIO,  Robert  A.  Georgine, 

statement  1921 

Construction  Financial  Management  Association,  Joseph  J.   Lozano,  state- 
ment    1924 

Johnson,  Hon.  Nancy  L.,  a  Representative  in  Congress  from  the  State  of 

Connecticut,  statement  851 

MUitary  Coalition,  Paul  W.  Arcari  and  Michael  Ouellette,  letter  1929 

ESTATE  AND  GIFT 

American  Farm  Bureau  Federation,  statement  1957 

Appalachian  Mountain  Club,  Boston,  Mass.,  Jennifer  Melville,  statement 1942 

Appalachian  Trail  Conference,  Harpers  Ferry,  W.Va.,  John  Stokes  and  David 

N.  Startzell,  statement  1943 

Baptist  Foundation  of  Oklahoma,  James  H.  Lockhart,  statement  1931 


XIV 

Page 

Brandywine  Conservancy,  Chadda  Ford,  Pa.,  George  A.  Weymouth,  state- 
ment    1945 

Brennan,  Edward  V.,  Gray,  Caiy,  Ames  &  Frye,  La  Jolla,  Calif.,  statement 

and  attachments 1934 

Brewster,  Hon.  Bill,  a  Representative  in  Congress  from  the  State  of  Okla- 
homa, statement 1932 

Chesapeake  Bay  Foundation,  Annapolis,  Md.,  William  C.  Baker,  letter  1946 

Dutchess  Land  Conservancy,  Stanfordville,  N.Y.,  Ira  Stem,  statement 1947 

Johnson,  Hon.  Nancy  L.,  a  Representative  in  Congress  from  the  State  of 

Connecticut,  statement  609 

Land  Trust  Alliance,  Jean  W.  Hocker,  statement 1948 

Oregon  Trout,  Inc.,  Portland,  Ore.,  GeofF  Pampush,  letter  1950 

Piatt,  Ronald  L.,  and  Gregory  F.  Jenner,  McDermott,  Will  &  Emery,  Washing- 
ton, D.C.,  statement  1958 

Save  the  Bay,  Providence,  R.I.,  Curt  Spalding,  letter  1951 

South  Carolina  Coastal  Conservation  League,  Charleston,  S.C.,  Dana  Beach, 

statement  1952 

Ward  L.  Quaal  Co.,  Ward  L.  Quaal,  statement 1954 

Worthy,  K.  Martin,  Hopkins  &  Sutter,  Washington,  D.C.,  statement  611 

FOREIGN  TAX  PROVISIONS 

American  Petroleum  Institute,  statement  1961 

Bell  Atlantic  Corp.,  statement  and  attachment  1965 

Beneficial  Corp.,  Gary  J.  Perkinson,  statement 2012 

BirdsaU,  Inc.,  Riviera  Beach,  Fla.,  John  H.  Birdsall  HI,  letter  and  attach- 
ments    1997 

Cargill,  Inc.,  Minneapolis,  Minn.,  Bruce  H.  Bamett,  statement  and  attach- 
ments    2028 

Caribbean  Latin  American  Action,  Peter  Johnson,  letter  2009 

Chevron  Corp.: 

Statement 1985 

Statement  2016 

Chubb  Corp.,  Warren,  NJ.,  Dean  R.  OUare,  statement  1970 

Committee  on  State  Taxation,  Mark  Cahoon,  statement 2026 

Emergency  Committee  for  American  Trade,  Robert  L.  McNeill,  letter 1975 

Evans  Economics,  Inc.,  Washington,  D.C.,  Michael  K.  Evans,  letter 2006 

Federal-Mogul  Corp.,  Detroit,  Mich.,  Robert  C.  Rozycki,  statement  2019 

Federation  of  American  Controlled  Shipping,  Philip  J.  Loree,  statement  1987 

General  Motors  Corp.,  statement  2014 

Information  Tecnology  Association  of  America,  Luanne  James,  statement  1984 

Matsui,  Hon.  Robert  T.,  a  Representative  in  Congress  from  the  State  of 

California,  statement  674 

McClure,  Trotter  &  Mentz,  Chtd.,  Washington,  D.C.,  William  P.  McClure, 

statement  2023 

National  Foreign  Trade  Council,  Inc.,  statement 1976 

Shaw,  Hon.  E.  Clay,  Jr.,  a  Representative  in  Congress  from  the  State  of 

Florida,  statement 1996 

Tax  Executives  Institute,  Inc.,  Robert  H.  Perlman,  letter  1981 

NATURAL  RESOURCES 

American  Gas  Association,  statement 2062 

American  Methanol  Institute,  Raymond  A.  Lewis,  statement 2069 

American  Public  Power  Association,  Larry  Hobart;  National  Rural  Electric 
Cooperative  Association,  Bob  Bergland;  and  National  Association  of  Regu- 
latory Utility  Commissioners,  Thomas  Choman,  joint  letter  2095 

City  Utilities  of  Springfield,  Mo.,  Robert  E.  Roundtree,  letter  (forwarded 
by  the  Hon.  Mel  Hancock,  a  Representative  in  Congress  from  the  State 

of  Missouri)  2074 

Columbia  Gas  Development  Corp.,  Houston,  Tex.,  Robert  C.  Williams,  Jr., 

statement  2050 

Delson  Lumber  Co.,  Hardel  Mutual  Plywood  Corp.,  Manke  Lumber  Co.,  and 

Conifer  Pacific,  joint  statement 2034 

Destec  Energy,  Inc.,  Houston,  Tex.,  Charles  F.  Goff,  statement  2040 

Electric  Transportation  Coalition,  Kateri  A.  Callahan,  letter  2075 

Independent  Oil  and  Gas  Association  of  West  Virginia,  Rich  HefTelfinger, 

statement  2044 


XV 

Page 

Independent  Petroleum  Association  of  America,  Roy  W.  Willis,  letter  2080 

Kenetech/U.S.  Windpower,  Robert  T.  Boyd,  statement  2088 

Large  Public  Power  Council,  and  Salt  River  Project  of  Hioenix,  Ariz.,  Mai^ 

BonsaU,  statement  2085 

Los  Angeles,  Calif.,  City  of,  statement 2083 

Louisiana  Land  &  Exploration  Co.,  New  Orleans,   La.,   Leigjiton  Steward, 

statement  2054 

Matsui,  Hon.  Robert  T.,  a  Representative  in  Congress  from  the  State  of 

California,  statement  730 

MDU  Resources  Group,  Inc.,  Bismarii,  N.Dak.,  Robert  E.  Wood,  statement  2057 

Mitchell  Energy  &  Development  Corp.,  The  Woodlands,  Tex.,  Craig  G.  Good- 
man, letter  and  attachment  2059 

National  Rural  Electric  Cooperative  Association,  Bob  Bergland,  statement 718 

Natural  Resources  Defense  Council,  Marika  Tatsutani,  statement  2084 

Northeast  Public  Power  Association,  Westborough,  Mass.,  statement  {see  list- 
ing under  Multiple  Issues  heading) 
Nortnwest  Independent  Forest  Manufacturers,  Tacoma,  Wash.,  MJ.  "Gus" 

Kuehne,  statement  and  attachment  2036 

Sacramento,  Calif.,  Municipal  Utility  District,  statement  2096 

Southern  California  Public  Power  Authority,  Pasadena,  CaUf.,  statement  2086 

Tampa  (Fla.)  Electric  Co.,  statement  2042 

USX  Corp.,  statement  2091 

Washington  Citizens  for  World  Trade,  Olympia,  Wash.,  Nicholas  J.  Kirkmire, 

statement  2093 

Wise,  Hon.  Bob,  a  Representative  in  Congress  from  the  State  of  West  Vir- 
ginia, letter  and  attachments  2045 

HOUSING 

Ford,  Hon.  Harold  E.,  a  Representative  in  Congress  from  the  State  of 
Tennesses,  statement  and  attachment  849 

J&B  Management  Co.,  Fort  Lee,  N.J.,  Bernard  Rodin,  statement 2110 

Lowey,  Hon.  Nita  M.,  a  Representative  in  Congress  from  the  State  of  New 
York,  statement  2109 

National  Cooperative  Business  Center,  Russell  C.  Notar,  statement  2102 

New  York,  Citv  of,  Hon.  David  N.  Dinkins,  Mayor,  statement  (see  listing 
under  Multiple  Issues  heading) 

PacifiCorp  Financial  Services,  Portland,  Ore.,  William  E.  Peressini,  state- 
ment      2098 

Salem,  Irving,  and  Carol  A.  Quinn,  Latham  &  Watkins,  New  York,  N.Y., 
statement  2104 

TAX-EXEMPT  BONDS 

Alaska  Aerospace  Development  Corp.,  Anchorage,  Alaska,  H.P.  "Pat"  Ladner, 

statement  2114 

Alaska  Housing  Finance  Corp.,  statement  2117 

American  Association  of  Port  Authorities,  Jean  C.  Godwin,  letter  2146 

American  Public  Power  Association,  Larry  Hobart,  statement  2133 

Barca,  Hon.  Peter  W.,  a  Representative  in  Congress  from  the  State  of  Wiscon- 
sin, statement  2129 

Belz  Investment  Co.,  Inc.,  Memphis,  Tenn.,  Jack  A.  Belz,  statement  (see 
listing  under  Multiple  Issues  heading) 

Connecticut,  State  of,  Hon.  Joseph  M.  Suggs,  Jr.,  statement  2127 

Council  of  Envelopment  Finance  Agencies,  statement  2120 

Edison  Electric  Institute,  statement  2136 

Kennelly,  a  Representative  in  Congress  from  the  State  of  Connecticut,  Hon. 

Barbara  B.  statement  (see  listing  under  Multiple  Issues  heading) 
Kleczka,  Hon.  Gerald  D.,  a  Representative  in  Congress  from  the  State  of 

Wisconsin,  statement  2131 

Massachusetts  Municipal  Wholesale  Electric  Co.,  statement  2140 

Matsui,  Hon.  Robert  T.,  a  Representative  in  Congress  from  the  State  of 
California: 

Statement 853 

Statement 855 

National  Association  of  Bond  Lawyers,  statement  2141 


XVI 

Page 

National  Association  of  Independent  Colleges  and  Universities;  American 
Council  on  Education;  Association  of  American  Universities,  and  National 
Association  of  State  Universities  and  Land  Grant  Colleges,  Richard  F. 

Rosser,  joint  letter 2124 

New  Mexico,  State  of,  Hon.  Casey  Luna,  Lt.  Governor,  statement 2115 

New  York,  City  of,  Hon.  David  N.  Dinkins,  Mayor,  statement  (see  listing 

under  Multiple  Issues  heading) 
Northeast  FHiblic  Power  Association,  Westborough,  Mass.,  statement  (see  list- 
ing under  Multiple  Issues  heading) 

Stanford  University,  Stanford,  Calif.,  Peter  Van  Etten,  statement  2122 

Texas  Veterans  Land  Board,  Austin,  Tex.,  Garry  Mauro,  statement  2118 

Wisconsin  Department  of  Veterans  Affairs,  Daniel  D.  Stier,  letter  2119 

COMPLIANCE 

Brewster,  Hon.  Bill  K.,  a  Representative  in  Congress  from  the  State  of  Okla- 
homa, statement 1037 

MISCELLANEOUS  ISSUES 

Allegheny  Electric  Cooperative,  Inc.,  Harrisburg,  Pa.,  Ed  Uravic,  letter  2178 

American  Bakers  Association,  Paul  C.  Abenante,  letter  2191 

American  College  of  Trust  and  Estate  Counsel,  James  M.  Trapp,  letter  2198 

American  Vintners  Association,  statement  2167 

Arctic  Slope  Regional  Corp.,  (joldbelt  Corp.,  and  Sealaska  Corp.,  joint  state- 
ment     2151 

Art  Institute  of  Southern  California,  Laguna  Beach,  Calif.,  John  W.  Lottes, 

letter 2159 

Association  of  American  Medical  Colleges,  Robert  G.  Petersdorf,  M.D.,  letter  ..    2193 
Basin  Electric  Power  Cooperative,  Bismark,  N.Dak.,  Robert  L.  McPhaU,  state- 
ment      2180 

Belz  Investment  Co.,   Inc.,  Memphis,  Tenn.,  Jack  A,  Belz,  statement  (see 

listing  under  Multiple  Issues  heading) 
D'Amato,  Hon.  Alfonse  M.,  a  United  States  Senator  from  the  State  of  New 

York,  statement  2174 

Dairymen,  Inc.,  Boyd  M.  Cook,  statement 2163 

Harrington,  Carol  A.,  Kathryn  G.  Henkel,  Carlyn  S.  McCaffrey,  Lloyd  Leva 
Plaine,  and  Pam  H.  Schneider,  American  Bar  Association,  Real  Property, 

Probate  &  Trust  Section,  joint  letter 2201 

Harsch  Investment  Corp.,  Portland  Ore.,  Harold  and  Arlene  Schnitzer,  state- 
ment     2160 

Kanjorski,  Hon.  Paul  E.,  a  Representative  in  Congress  from  the  State  of 

Pennsylvania,  statement  2169 

Koncor  Forest  Products  Co.,  Anchorage,  Alaska,  John  Sturgeon,  statement  2155 

Maryville  University,  St.  Louis,  Mo.,  Keith  Lovin,  letter  2206 

Moakley,  Hon.  John  Joseph,  a  Representative  in  Congress  from  the  State 

of  Massachusetts,  statement  2196 

Myers,  Robert  J.,  Silver  Spring,  Md.,  statement  2195 

National  Association  for  the  Self-Employed,  Bennie  L.  Thayer,  letter  (see 

listing  under  Multiple  Isssues  heading) 
NationS  Presto  Industries,  Inc.,  Eau  Claire,  Wis.,  Joseph  H.  Bemey,  state- 
ment      2183 

National  Staff  Leasing  Association,  Rob  Lederer,  letter  2186 

Neal,  Hon.  Richard  E.,  a  Representative  in  Congress  from  the  State  of  Massa- 
chusetts, statement  2197 

New  York,  State  of,  Vincent  Tese,  statement 2176 

Shoshone  and  Arapaho  Tribes'  Joint  Business  Council,  Fort  Washakie,  Wyo., 

Richard  L.  Ortiz,  letter  and  attachment  2148 

Sierra  Semiconductor  Corp.,  James  V.  Diller,  statement  and  attachments  2187 

Southland  Corp.,  Dallas,  Tex.,  Ronald  L.  Piatt,  statement 2171 

University  of  Arkansas,  Fayetteville,  Ark.,  A.H.  Edwards,  letter 2208 

Western  Farmers  Electric  Cooperative,  Anadarko,  Okla.,  James  D. 
Pendergrass,  statement 2165 

MULTIPLE  ISSUES 

Belz  Investment  Co.,  Inc.,  Memphis,  Tenn.,  Jack  A.  Belz,  statement  2209 

Investment  Co.  Institute,  statement  2211 


XVII 

Page 

Kennelly,  Hon.  Barbara  B.,  a  Representative  in  Congress  from  the  State 

of  Connecticut,  statement  2219 

National  Association  for  the  Self -Employed,  Bennie  L.  Thayer,  letter  2221 

New  York,  City  of,  Hon.  David  N.  Dinkins,  Mayor,  statement 2223 

Northeast  Public  Power  Association,  Westborough,  Mass.,  statement  2230 

Combined  Listing  by  Name  and  Organization  (Losers) 

Abenante,  Paul  C,  American  Bakers  Association,  letter  2191 

Alaska  Aerospace  Development  Corp.,  Anchorage,  Alaska,  H.P.  "Pat"  Ladner, 

statement  2114 

Alaska  Housing  Finance  Corp.,  statement  2117 

Alcoma  Association,  Inc.,  Lake  Wales,  Fla.,  Lawrence  C.  Updike,  statement  ....  1858 

Allegheny  Electric  Cooperative,  Inc.,  Harrisburg,  Pa.,  Ed  Uravic,  letter  2178 

AlliedSignal  Inc.,  Ronald  A.  Sinaikin,  statement  1908 

American  Association  of  Port  Authorities,  Jean  C.  Gfodwin,  letter  2146 

American  Automobile  Manufacturers  Association,  statement  1883 

American  Bakers  Association,  Paul  C.  Abenante,  letter  2191 

American  College  of  Trust  and  Estate  Counsel,  James  M.  Trapp,  letter  2198 

American  Council  on  Education,  Richard  F.  Rosser,  joint  letter  {see  listing 
for  National  Association  of  Independent  Colleges  and  Universities 

American  Dental  Association,  statement  and  attachment  1926 

American  Farm  Bureau  Federation,  statement  1957 

American  Gas  Association,  statement 2062 

American  Legion,  Steve  A.  Robertson,  statement 1887 

American  Methanol  Institute,  Rajrmond  A.  Lewis,  statement 2069 

American  Petroleum  Institute,  statement  1961 

American  Public  Power  Association,  Larry  Hobart,  statement  2133 

American  Public  Power  Association,  Larry  Hobart;  National  Rural  Electric 
Cooperative  Association,  Bob  Bergland;  and  National  Association  of  Regu- 
latory Utility  Commissioners,  Thomas  Choman,  joint  letter  2095 

American  Society  for  Payroll  Management,  Robert  D.  Williamson,  statement  ..  1917 

American  Vintners  Association,  statement  2167 

Anderson,  Kathy  L.,  KPMG  Peat  Marwick,  New  York,  N.Y.,  letter  1811 

Appalachian  Mountain  Club,  Boston,  Mass.,  Jennifer  Melville,  statement 1942 

Appalachian  Trail  Conference,  Harpers  Ferry,  W.Va.,  John  Stokes  and  David 

N.  Startzell,  statement  1943 

Arcari,  Paul  W.,  Military  Coalition,  letter 1929 

Archer,  John  S.,  Commerce  Bancshares,  Inc.,  Kansas  City,  Mo.,  letter  1798 

Arctic  Slope  Regional  Corp.,  Goldbelt  Corp.,  and  Sealaska  Corp.,  joint  state- 
ment    2151 

Arkansas  Electric  Cooperative  Corp.,  Carl  S.  Whillock,  letter  1870 

Art  Institute  of  Southern  California,  Laguna  Beach,  Calif.,  John  W.  Lottes, 

letter 2159 

Associated  Bank,  NA,  Neenah,  Wis.,  Michael  B.  Mahlik,  letter 1792 

Associated  Builders  and  Contractors,  Inc.,  Charles  E.  Hawkins  III,  letter 1919 

Association  of  American  Medical  Colleges,  Robert  G.  Petersdorf,  M.D.,  letter  ..  2193 
Association  of  American   Universities  (see  listing  for  National  Association 

of  Independent  Colleges  and  Universities) 
Association  of  Financial  Guaranty  Insurers,  William  A.  Geoghegan,  statement 

and  attachments 1837 

August,  Jerald  David,  Florida  Bar,  Tax  Section,  statement  1849 

Baker,  Michael  C,  Bamett  Banks  Trust  Co.,  NA.,  Jacksonville,  Fla.,  letter  ....  1797 

Baker,  William  C,  Chesapeake  Bay  Foundation,  Annapolis,  Md.,  letter  1946 

Bank  Securities  Association,  statement 1793 

Bank  South,  NA.,  Atlanta,  Ga.,  J.  Blake  Young,  Jr.,  letter  1796 

Baptist  Foundation  of  Oklahoma,  James  H.  Lockhart,  statement  1931 

Barca,  Hon.  Peter  W.,  a  Representative  in  Congress  from  the  State  of  Wiscon- 
sin, statement  2129 

Bamett  Banks  Trust  Co.,  N.A.,  Jacksonville,  Fla.,  Michael  C.  Baker,  letter 1797 

Bamett,  Bruce  H.,  Cargill,  Inc.,  Minneapolis,  Minn.,  statement  and  attach- 
ments    2028 

Basin  Electric  Power  Cooperative,  Bismark,  N.Dak.,  Robert  L.  McPhail,  state- 
ment    2180 

Beach,  Dana,  South  Carolina  Coastal  Conservation  League,  Charleston,  S.C, 

statement  1952 


XVIII 

Page 
Bedford  County  (Va.)  Circuit  Court,  Hon.  William  W.  Sweeney,  letter  (for- 
warded  by  the  Hon.  L.F.  Payne,  a  Representative  in  Congress  from  the 

State  of  Virginia) 1896 

Bell  Atlantic  Corp.,  statement  and  attachment  1965 

Belz  Investment  Co.,  Inc.,  Memphis,  Tenn.,  Jack  A.  Belz,  statement  2209 

Beneficial  Corp.,  Gary  J.  Perkinson,  statement  2012 

Bergland,  Bob,  National  Rural  Electric  Cooperative  Association: 

Statement  718 

Statement  1871 

Joint  letter  (see  listing  for  American  Public  Power  Association) 
Bemey,  Joseph  H.,  National  Presto  Industries,  Inc.,  Eau  Claire,  Wis.,  state- 
ment      2183 

Birdsall,  Inc.,  Riviera  Beach,  Fla.,  John  H.  BLrdsall  III,  letter  and  attach- 
ments      1997 

Bonsall,  Mark,  Large  Public  Power  Council,  and  Salt  River  Project  of  Phoenix, 

Ariz.,  statement  2085 

Boyd,  Robert  T.,  Kenetech/U.S.  Windpower,  statement  2088 

Brandywine  Conservancy,  Chadds  Ford,  Pa.,  George  A.  Weymouth,  state- 
ment      1945 

Brennan,  Edward  V.,  Gray,  Gary,  Ames  &  Frye,  La  JoUa,  Calif.,  statement 

and  attachments 1934 

Brewster,  Hon.  Bill,  a  Representative  in  Congress  from  the  State  of  Okla- 
homa: 

Statement  1932 

Statement  1037 

Britt,  Raymond  L.,  Jr.,  Canadian  Life  and  Health  Insurance  Association, 

statement  1826 

Building  and  Construction  Trades  Department,  AFL-CIO,  Robert  A.  Georgine, 

statement  1921 

Cahoon,  Mark,  Committee  on  State  Taxation,  statement  2026 

Callahan,  Kateri  A.,  Electric  Transportation  Coalition,  letter  2075 

Canadian   Life   and  Health   Insurance  Association,   Raymond   L.   Britt,  Jr., 

and  Mary  V.  Harcar,  statement 1826 

Cargill,  Inc.,  Minneapolis,  Minn.,  Bruce  H.  Bamett,  statement  and  attach- 
ments      2028 

Caribbean  Latin  American  Action,  Peter  Johnson,  letter  2009 

Ceradini,  Jr.,  August  J.,  New  York  Cruise  Lines,  Inc.,  letter 1879 

Chesapeake  Bay  Foundation,  Annapolis,  Md.,  William  C.  Baker,  letter  1946 

Chevron  Corp.: 

Statement  1985 

Statement  2016 

Choman,  Thomas,  National  Association  of  Regulatory  Utililty  Commissioners, 
joint  letter  (see  listing  for  American  FHiblic  Power  Association) 

Chrysler  Corp.,  Robert  G.  Liberatore,  statement  and  attachment  1902 

Chubb  Corp.,  Warren,  N.J.,  Dean  R.  CHare,  statement  1970 

City  Utilities  of  Springfield,  Mo.,  Robert  E.  Roundtree,  letter  (forwarded 
by  the  Hon.  Mel  Hancock,  a  Representative  in  Congress  from  the  State 

of  Missouri)  2074 

Coleman,  James  P.,  First  Source  Bank,  South  Bend,  Ind.,  letter  1804 

Colonial  Life  &  Accident  Insurance  Co.,  Inc.,  Columbia,  S.C.,  statement  and 

attachment  1844 

Columbia  Gas  Development  Corp.,  Houston,  Tex.,  Robert  C.  Williams,  Jr., 

statement  2050 

Commerce  Bancshares,  Inc.,  Kansas  City,  Mo.,  John  S.  Archer,  letter  1798 

Committee  of  Annuity  Insurers,  statement  and  attachment  1898 

Committee  on  State  Taxation,  Mark  Cahoon,  statement 2026 

Conifer  Pacific,  joint  statement  (see  listing  for  Delson  Lumber  Co.) 

Connecticut,  State  of,  Hon.  Joseph  M.  Suggs,  Jr.,  statement  2127 

Construction  Financial  Management  Association,  Joseph  J.   Lozano,   state- 
ment      1924 

Cook,  Boyd  M.,  Dairymen,  Inc.,  statement 2163 

Council  of  Development  Finance  Agencies,  statement  2120 

Coyne,  Daniel  W.,  Mutual  of  America,  letter  1836 

Cnsalli,  Donna  M.,  Washington,  D.C.,  statement 1889 

D'Agostino  Supermarkets,  Inc.,  Larchmont,  N.Y.,  Nicholas  D'Agostino,  Jr., 

letter 1885 

D'Amato,  Hon.  Alfonse  M.,  a  United  States  Senator  from  the  State  of  New 
York,  statement  2174 


XIX 

Page 

Dairymen,  Inc.,  Boyd  M.  Cook,  statement 2163 

Delson  Lumber  Co.,  Hardel  Mutual  Plywood  Corp.,  Manke  Lumber  Co.,  and 

Conifer  Pacific,  joint  statement 2034 

Delta  Queen  Steamboat  Co.,  New  Orleans,  La.,  statement  1876 

Destec  Energy,  Inc.,  Houston,  Tex.,  Charles  F.  Goff,  statement  2040 

DiUer,  James  V.,  Sierra  Semiconductor  Corp.,  statement  and  attachments  2187 

DiMatties,  AJ.,  Midlantic  National  Bank,  Edison,  NJ.,  letter 1814 

Dinkins,  Hon.  David  N.,  Mayor,  City  of  New  York,  statement 2223 

Dutchess  Land  Conservancy,  StanfordviUe,  N.Y.,  Ira  Stem,  statement 1947 

Edison  Electric  Institute,  statement  2136 

Edwards,  A.H.,  University  of  Arkansas,  Fayetteville,  Ark.,  letter  2208 

Electric  Transportation  Coalition,  Kateri  A.  Callahan,  letter  2075 

Emereency  Committee  for  American  Trade,  Robert  L.  McNeiU,  letter 1975 

ESOP  Associ ation : 

Statement  1901 

J.  Michael  Keeling,  statement  1906 

Evans  Economics,  Inc.,  Washington,  D.C.,  Michael  K.  Evans,  letter 2006 

Farley,  E.  Philip,  Old  Kent  Bank  and  Trust  Co.,  Grand  Rapids,  Mich.,  letter  ..  1816 

Federal-Mogul  Corp.,  Detroit,  Mich.,  Robert  C.  Rozycki,  statement  2019 

Federation  of  American  Controlled  Shipping,  Philip  J.  Loree,  statement  1987 

First  FideUty  Bank,  NA.,  New  Jersey,  John  J.  Phillips,  letter 1799 

First  National  Bank  of  Chicago,  Michael  P.  Traba,  statement 1801 

Fu^t  Source  Bank,  South  Bend,  Ind.,  James  P.  Coleman,  letter  1804 

First  Trust  National  Association,  St.  Paul,  Minn.,  John  M.  Murphy,  Jr., 

letter 1805 

Florida  Btir,  Tax  Section,  Jerald  David  August,  statement  1849 

Ford,   Hon.   Harold  E.,   a   Representative   in   Congress   from   the  State   of 

Tennesses,  statement  and  attachment  849 

General  Motors  Corp.,  statement  2014 

Geoghegan,  William  A.,  Association  of  Financial  Guaranty  Insurers,  state- 
ment and  attachments  1837 

Georgine,  Robert  A.,  Building  and  Construction  Trades  Department,  AFL- 

CIO,  statement  1921 

Godwin,  Jean  C,  American  Association  of  Port  Authorities,  letter  2146 

Goff,  Charles  F.,  Destec  Energy,  Inc.,  Houston,  Tex.,  statement  2040 

Goldbelt  Corp.,  joint  statement  {see  listing  for  Arctic  Slope  Regional  Corp.) 
Goodman,  Craig  G.,  Mitchell  Energy  &  Development  Corp.,  The  Woodlands, 

Tex.,  letter  and  attachment 2059 

GrifTm  Industries,  Inc.,  Cold  Spring,  Kv.,  Dennis  B.  Grifiin,  statement  1864 

Harcar,  Mary  V.,  Canadian  Life  and.  Health  Insurance  Association,  state- 
ment    1826 

Hardel  Mutual  Plywood  Corp.,  joint  statement  (see  listing  for  Delson  Lumber 

Co.) 

Harper,  H.  Mitchell,  Texas  Commerce  Investment  Co.,  Houston,  Tex.,  letter  ...  1818 
Harrington,  Carol  A.,  Kathryn  G.  Henkel,  Carlyn  S.  McCaffrey,  Llovd  Leva 
Plaine,  and  Pam  H.  Schneider,  American  Bar  Association,  Real  Property, 

Probate  &  Trust  Section,  joint  letter 2201 

Harsch  Investment  Corp.,  Portland  Ore.,  Harold  and  Arlene  Schnitzer,  state- 
ment    2160 

Hastings,  Barry  G.,  Northern  Trust  Co.,  Chicago,  111.,  letter  1815 

Hawaiian  Trust  Co.,  Ltd.,  Honolulu,  Hawaii,  Douglas  Philpotts,  letter 1807 

Hawkins,  Charles  E.,  Ill,  Associated  Builders  and  Contractors,  Inc.,  letter 1919 

Heffelfinger,  Rich,  Independent  Oil  and  Gas  Association  of  West  Virginia, 

statement  2044 

Henkel,  Kathryn  G.,  American  Bar  Association,  Real  Property,  Probate  & 
Trust  Section,  ioint  letter  (see  listing  for  Carol  A.  Harrington) 

Herman,  Michael  E.,  Kansas  City  Royals  Baseball,  statement  1385 

Hobart,  Larry,  American  Public  Power  Association;  National  Rural  Electric 
Cooperative  Association,  Bob  Bergland;  and  National  Association  of  Regu- 
latory Utility  Commissioners,  Thomas  Choman,  joint  letter  2095 

Hobart,  Larry,  American  Public  Power  Association,  statement  2133 

Hocker,  Jean  W.,  Land  Trust  Alliance,  statement 1948 

Hynes,  Timothy  J.,  Ill,  Security  Trust  Co.,  NA.,  Baltimore,  Md.,  letter  1817 

Illinois  Supreme  Court,  Hon.  Benjamin  K.  Miller,  Chief  Justice,  letter  and 

attachment 1893 

Independent  Bankers  Association  of  America,  James  R.  LaufTer,  statement 1809 

Independent  Oil  and  Gas  Association  of  West  Virginia,  Rich  Hefielfinger, 

statement  2044 


XX 

Page 

Independent  Petroleum  Association  of  America,  Roy  W.  Willis,  letter  2080 

Information  Tecnology  Association  of  America,  Luanne  James,  statement  1984 

Investment  Co.  Institute,  statement  2211 

J&B  Management  Co.,  Fort  Lee,  N.J.,  Bernard  Rodin,  statement 2110 

James,  Luanne,  Information  Tecnology  Association  of  America,  statement  1984 

Jenner,  Gregory  F.,  and  Ronald  L.  Piatt,  McDermott,  Will  &  Emery,  Washing- 
ton, D.C.,  statement  1958 

Johnson,  Hon.  Nancy  L.,  a  Representative  in  Congress  from  the  State  of 
Connecticut: 

Statement  609 

Statement  851 

Johnson,  Peter,  Caribbean  Latin  American  Action,  letter  2009 

Kanjorski,  Hon.  Paul  E.,  a  Representative  in  Congress  from  the  State  of 

Pennsylvania,  statement  2162 

Kansas  City  Royals  Baseball,  Michael  E.  Herman,  statement  1385 

Keeling,  J.  Michael,  ESOP  Association,  statement 1906 

KenetechAJ.S.  Windpower,  Robert  T.  Boyd,  statement  2088 

Kennelly,  Hon.  Barbara  B.,   a  Representative  in  Congress  from  the  State 

of  Connecticut,  statement  2219 

Kirkmire,  Nicholas  J.,  Washington  Citizens  for  World  Trade,  Olympia,  Wash., 

statement  2093 

Kleczka,  Gerald  D.,  a  Representative  in  Congress  from  the  State  of  Wisconsin, 

statement  2131 

Koncor  Forest  Products  Co.,  Anchorage,  Alaska,  John  Sturgeon,  statement  2155 

KPMG  Peat  Marwick,  New  York,  N.Y.,  Kathy  L.  Anderson,  letter  1811 

Kuehne,  M.J.  "Gus",  Northwest  Independent  Forest  Manufacturers,  Tacoma, 

Wash.,  statement  and  attachment 2036 

Lackritz,  Marc  E.,  Securities  Industry  Association,  statement  1823 

Ladner,  H.P.  'Tat",  Alaska  Aerospace  Development  Corp.,  Anchorage,  Alaska, 

statement  2114 

Land  Trust  Alliance,  Jean  W.  Hocker,  statement 1948 

Large  Public  Power  Council,  Phoenix,  Ariz.,  Mark  Bonsall,  statement 2085 

Lauffer,  James  R.,  Independent  Bankers  Association  of  America,  statement  ....  1809 

LeBoeuf,  Raymond  W.,  PPG  Industries,  Inc.,  statement  1911 

Lederer,  Rob,  National  Staff  Leasing  Association,  letter  2186 

Leszinske,  William  O.,  Texas  Commerce  Investment  Co.,  Houston,  Tex.,  let- 
ter    1819 

Lewis,  Raymond  A.,  American  Methanol  Institute,  statement 2069 

Liberatore,  Robert  G.,  Chrysler  Corp.,  statement  and  attachment  1902 

Lockhart,  James  H.,  Baptist  Foundation  of  Oklahoma,  statement  1931 

Loree,  Philip  J.,  Federation  of  American  Controlled  Shipping,  statement  1987 

Los  Angeles,  Calif.,  City  of,  statement 2083 

Lottes,  John  W.,  Art  Institute  of  Southern  California,  Laguna  Beach,  Calif., 

letter 2159 

Louisiana  Land  &  Exploration  Co.,  New  Orleans,   La.,  Lei^ton  Steward, 

statement  2054 

Lovin,  Keith,  Maryville  University,  St.  Louis,  Mo.,  letter  2206 

Lowey,  Hon.  Nita  M.,  a  Representative  in  Congress  from  the  State  of  New 

York,  statement  2109 

Lozano,  Joseph  J.,  Construction  Financial  Management  Association,  state- 
ment    1924 

Luna,  Hon.  Casey,  Lt.  Governor,  State  of  New  Mexico,  statement  2115 

Magna  Trust  Co.,  Belleville,  111.,  Peter  C.  Merzian,  letter  1812 

Mahlik,  Michael  B.,  Associated  Bank,  N.A,  Neenah,  Wis.,  letter 1792 

Manke  Lumber  Co.,  joint  statement  {.see  listing  for  Delson  Lumber  Co.)  2034 

Maryville  University,  St.  Louis,  Mo.,  Keith  Lovin,  letter  2206 

Massachusetts  Municipal  Wholesale  Electric  Co.,  statement  2140 

Matsui,  Hon.  Robert  T.,  a  Representative  in  Congress  from  the  State  of 
California: 

Statement  674 

Statement  730 

Statement  853 

Statement  855 

Mauro,  Garry,  Texas  Veterans  Land  Board,  Austin,  Tex.,  statement  2118 

McCaffrey,  Caryln  S.,  American  Bar  Association,  Real  Property,  Probate  & 

Trust  Section,  joint  letter  {see  listing  for  Carol  A.  Harrington) 
McClure,  Trotter  &  Mentz,  Chtd.,  Washington,  D.C.,  William  P.  McClure, 

statement  2023 


XXI 

Page 

McNeill,  Robert  L.,  Emergency  Committee  for  American  Trade,  letter 1975 

McPhaU,  Robert   L.,   Basin  Electric  Power  Cooperative,   Bismark,  N.Dak., 

statement  2180 

MDU  Resources  Group,  Inc.,  Bismaric,  N.Dak.,  Robert  E.  Wood,  statement  2057 

Melville,  Jennifer,  Appalachian  Mountain  Club,  Boston,  Mass.,  statement 1942 

Meridian  Asset  Management,  Inc.,  Valley  Forge,  Pa.,  Robert  C.  Williams, 

letter 1813 

Merzian,  Peter  C,  Magna  Trust  Co.,  Belleville,  DL,  letter 1812 

Midlantic  National  Bank,  Edison,  NJ.,  AJ.  DiMatties,  letter 1814 

Military  Coalition,  Michael  Ouelette  and  Paul  W.  Arcari,  letter  1929 

MUler,  Hon.  Benjamin  K.,  Chief  Justice,  Dlinois  Supreme  Court,  letter  and 

attachment 1893 

Mitchell  Energy  &  Development  Corp.,  The  Woodlands,  Tex.,  Craig  G.  Good- 
man, letter  and  attachment  2059 

Moakley,  Hon.  John  Joseph,  a  Representative  in  Congress  from  the  State 

of  Massachusetts,  statement  2196 

Murphy,  John  M.,  Jr.,  First  Trust  National  Association,  St.  Paul,  Minn., 

letter 1805 

Mutual  of  America,  Daniel  W.  Coyne,  letter  1836 

Myers,  Robert  J.,  Silver  Spring,  Md.,  statement  2195 

National  Association  for  the  Self-Employed,  Bennie  L.  Thayer,  letter  2221 

National  Association  of  Bond  Lawyers,  statement  2141 

National  Association  of  Independent  Colleges  and  Universities;  American 
Council  on  Education;  and  National  Association  of  State  Universities  and 

Land  Grant  Colleges,  Richard  F.  Rosser,  joint  letter 2124 

National  Association  of  Regulatory  Utililty  Commissioners: 

Thomas  Choman,  joint  letter  (see  listing  for  American  Public  Power  Asso- 
ciation) 

Linda  Bisson  Stevens,  letter  and  attachments  1787 

National  Association  of  State  Universities  and  Land  Grant  Colleges,  Richard 
F.  Rosser,  joint  letter  (see  listing  for  National  Association  of  Independent 
Colleges  and  Universities) 

National  Cooperative  Business  Center,  Russell  C.  Notar,  statement  2102 

National  Foreign  Trade  Council,  Inc.,  statement 1976 

National  Presto  Industries,  Inc.,  Eau  Claire,  Wis.,  Joseph  H.  Bemey,  state- 
ment      2183 

National  Rural  Electric  Cooperative  Association,  Bob  Bergland: 
Joint  letter  (see  listing  for  American  Public  Power  Association) 

Statement  718 

Statement  1871 

National  Staff  Leasing  Association,  Rob  Lederer,  letter  2186 

Natural  Resources  Defense  Council,  Marika  Tatsutani,  statement  2084 

Neal,  Hon.  Richard  E.,  a  Representative  in  Congress  from  the  State  of  Massa- 
chusetts, statement  2197 

New  Mexico,  State  of,  Hon.  Casey  Luna,  Lt.  Governor,  statement  2115 

New  York,  City  of,  Hon.  David  N.  Dinkins,  Mayor,  statement 2223 

New  York  Cruise  Lines,  Inc.,  August  J.  Ceradini,  Jr.,  letter 1879 

New  York,  State  of,  Vincent  Tese,  statement 2176 

Non   Commissioned  Officers  Association  of  the  United  States  of  America, 

Larry  D.  Rhea  and  Michael  F.  Ouelette,  statement 1913 

Northeast  Public  Power  Association,  Westborough,  Mass.,  statement  2230 

Northern  Trust  Co.,  Chicago,  HI,  Barry  G.  Hastings,  letter  1815 

Northwest  Independent  Forest  Manufacturers,  Tacoma,  Wash.,  M.J.  "Gus" 

Kuehne,  statement  and  attachment  2036 

Notar,  Russell  C,  National  Cooperative  Business  Center,  statement  2102 

Novack,  Kenneth  M.,  Schnitzer  Investment  Corp.,  Portland,  Ore.,  statement  ..    1866 

©"Hare,  Dean  R.,  Chubb  Corp.,  Warren,  NJ.,  statement  1970 

Old  Kent  Bank  and  Trust  Co.,  Grand  Rapids,  Mich.,  E.  Philip  Farley,  letter  ...    1816 

Oregon  Trout,  Inc.,  Portland,  Ore.,  Geoff  Pampush,  letter  1950 

Ortiz,  Richard  L.,  Shoshone  and  Arapaho  Tribes'  Joint  Business  Council, 

Fort  Washakie,  Wyo.,  letter  and  attachment 2148 

Ouelette,  Michael: 

Militaiy  Coalition,  letter  1929 

Non  Commissioned  Officers  Association  of  the  United  States  of  America, 

statement  1913 

PacifiCorp  Financial  Services,  Portland,  Ore.,  William  E.  Peressini,  state- 
ment      2098 

Pampush,  Geoff,  Oregon  Trout,  Inc.,  Portland,  Ore.,  letter  1950 


XXII 

Page 

Passenger  Vessel  Association,  Eric  G.  Scharf,  letter  1880 

Pendei^ass,  James  D.,  Western  Farmers  Electric  Cooperative,  Anadarko, 

Okla.,  statement  2165 

Peressini,  William  E.,  PacifiCorp  Financial  Services,  Portland,  Ore.,  state- 
ment    2098 

Perkinson,  Gary  J.,  Beneficial  Corp.,  statement  2012 

Perlman,  Robert  H.,  Tax  Executives  Institute,  Inc.,  letter 1981 

Petersdorf,  M.D.,  Robert  G.,  Association  of  American  Medical  Colleges,  letter  .  2193 

Phillips,  John  J.,  First  Fidelity  Bank,  NA.,  New  Jersey,  letter 1799 

Philpotts,  Douglas,  Hawaiian  Trust  Co.,  Ltd.,  Honolulu,  Hawaii,  letter  1807 

Plaine,   Lloyd   Leva,  American  Bar  Association,   Real  Property,  Probate   & 

Trust  Section,  joint  letter  (see  listing  for  Carol  A.  Harrington) 
Piatt,  Ronald  L.,  and  Gregory  F.  Jenner,  McDermott,  Will  &  Emery,  Washing- 
ton, D.C.,  statement  1958 

Piatt,  Ronald  L.,  Southland  Corp.,  Dallas,  Tex.,  statement 2171 

PPG  Industries,  Inc.,  Raymond  W.  LeBoeuf,  statement  1911 

Quaal,  Ward  L.,  Ward  L.  Quaal  Co..  statement 1954 

Quinn,  Carol  A.,  and  Irving  Salem,  Latham  &  Watkins,  New  York,  N.Y., 

statement  2104 

Rahall,  Hon.  Nick  J.,  II,  a  Representative  in  Congress  from  the  State  of 

West  Virginia,  statement 1890 

Rhea,  Larry  D.,  Non  Commissioned  Officers  Association  of  the  United  States 

of  America,  statement  1913 

Robertson,  Steve  A.,  American  Legion,  statement  1887 

Rodin,  Bernard,  J&B  Management  Co.,  Fort  Lee,  NJ.,  statement 2110 

Rosser,  Richard  F.,  National  Association  of  Independent  Colleges  and  Univer- 
sities; American  Council  on  Education;  and  National  Association  of  State 

Universities  and  Land  Grant  Colleges,ioint  letter  2124 

Roundtree,  Robert  E.,  City  Utilities  of  Springfield,  Mo.,  letter  (forwarded 
by  the  Hon.  Mel  Hancock,  a  Representative  in  Congress  from  the  State 

of  Missouri)  2074 

Rozycki,  Robert  C,  Federal-Mogul  Corp.,  Detroit,  Mich.,  statement  2019 

Sacramento,  Calif.,  Municipal  Utility  District,  statement  2096 

Salem,  Irving,  and  Carol  A.  Quinn,  Latham  &  Watkins,  New  York,  N.Y., 

statement  2104 

Salt  River  Project  of  Phoenix,  Ariz.,  Mark  Bonsall,  statement  2085 

Save  the  Bay,  Providence,  R.L,  Curt  Spalding,  letter  1951 

Savings  Bank  Life  Insurance  Co.,  Wobum,  Mass.,  Robert  K.  Sheridan,  state- 
ment    1820 

Savville  Ferry,  Sayville,  N.Y.,  Ken  Stein,  Jr.,  letter  1882 

Scharf,  Eric  G.,  Passenger  Vessel  Association,  letter  1880 

Schneider,  Pam  H.,  American  Bar  Association,  Real  Property,  Probate   & 

Trust  Section,  joint  letter  (see  listing  for  Carol  A.  Harrington) 
Schnitzer,  Harold  and  Arlene,  Harsch  Investment  Corp.,  Portland  Ore.,  state- 
ment    2160 

Schnitzer  Investment  Corp.,  Portland,  Ore.,  Kenneth  M.  Novack,  statement  ...  1866 
Sealaska  Corp.,  joint  statement  (see  listing  for  Arctic  Slope  Regional  Corp.) 

Securities  Industry  Association,  Marc  E.  Lackritz,  statement  1823 

Security  Trust  Co.,  N.A.,  Baltimore,  Md.,  Timothy  J.  Hynes  III,  letter  1817 

Shaw,  Hon.  E.  Clay,  Jr.,  a  Representative  in  Congress  from  the  State  of 

Florida,  statement  1996 

Sheridan,  Robert  K.,  Savings  Bank  Life  Insurance  Co.,  Wobum,  Mass.,  state- 
ment    1820 

Shoshone  and  Arapaho  Tribes'  Joint  Business  Council,  Fort  Washakie,  Wyo., 

Richard  L.  Ortiz,  letter  and  attachment  2148 

Sierra  Semiconductor  Corp.,  James  V.  Diller,  statement  and  attachments  2187 

Sinaikin,  Ronald  A.,  AlliedSignal  Inc.,  statement  1908 

Solo  Cup  Co.,  statement  1859 

South  Carolina  Coastal  Conservation  League,  Charleston,  S.C,  Dana  Beach, 

statement  1952 

Southern  California  Public  Power  Authority,  Pasadena,  Calif.,  statement  2086 

Southland  Corp.,  Dallas,  Tex.,  Ronald  L.  Piatt,  statement 2171 

Spalding,  Curt,  Save  the  Bay,  Providence,  R.I.,  letter  1951 

Stanford  University,  Stanford,  Calif.,  Peter  Van  Etten,  statement  2122 

Startzell,  David  N.,  Appalachian  Trail  Conference,  Harpers  Ferry,  W.Va., 

statement  1943 

Stein,  Ken,  Jr.,  Sayville  Ferry,  Sayville,  N.Y.,  letter  1882 

Stem,  Ira,  Dutchess  Land  Conservancy,  Stanfordville,  N.Y.,  statement 1947 


XXIII 

Page 

Stevens,  Linda  Bisson,  National  Association  of  Regulatory  Utility  Commis- 
sioners, letter  and  attachments  1787 

Steward,  Leighton,  Louisiana  Land  &  Exploration  Co.,  New  Orleans,  La., 

statement  2054 

Stier,  Daniel  D.,  Wisconsin  Department  of  Veterans  Affairs,  letter  2119 

Stokes,  John,  Appalachian  Trail  Conference,  Harpers  Ferry,  W.Va.,  state- 
ment    1943 

Stump,  Hon.  Bob,  a  Representative  in  Congress  from  the  State  of  Arizona, 

letter  and  attachment  1892 

Sturgeon,  John,  Konoor  Forest  Products  Co.,  Anchorage,  Alaska,  statement  ....  2155 

Suggs,  Hon.  Joseph  M.,  Jr.,  Connecticut,  State  of,  statement  2127 

Sweeney,  Hon.  William  W.,  Bedford  County  (Va.)  Circuit  Court,  letter  (for- 
warded by  the  Hon.  L.F.  Payne,  a  Representative  in  Congress  from  the 

State  of  Virginia) 1896 

Tampa  (Fla.)  Electric  Co.,  statement  2042 

Tatsutani,  Marika,  Natural  Resources  Defense  Council,  statement  2084 

Tax  Executives  Institute,  Inc.,  Robert  H.  Perlman,  letter  1981 

Tese,  Vincent,  State  of  New  York,  statement 2176 

Texas  Commerce  Investment  Co.,  Houston,  Tex.: 

H.  Mitchell  Harper,  letter 1818 

William  O.  Leszinske,  letter  1819 

Texas  Veterans  Land  Board,  Austin,  Tex.,  Garry  Mauro,  statement  2118 

Thayer,  Bennie  L.,  National  Association  for  the  Self-Employed,  letter  2221 

Traba,  Michael  P.,  First  National  Bank  of  Chicago,  statement 1801 

Trapp,  James  M.,  American  College  of  Trust  andEstate  Counsel,  letter  2198 

University  of  Arkansas,  Fayetteville,  Ark.,  A.H.  Edwards,  letter  2208 

Updike,  Lawrence  C,  Alcoma  Association,  Inc.,  Lake  Wales,  Fla.,  statement  ...  1858 

Uravic,  Ed,  Allegheny  Electric  Cooperative,  Inc.,  Harrisburg,  Pa.,  letter  2178 

USX  Corp.,  statement  2091 

Van  Etten,  Peter,  Stanford  University,  Stanford,  Calif.,  statement  2122 

Ward  L.  Quaal  Co.,  Ward  L.  Quaal,  statement 1954 

Washington  Citizens  for  World  Trade,  Olympia,  Wash.,  Nicholas  J.  Kiricmire, 

statement  2093 

Wells  Manufacturing  Co.,  statement  1862 

Western     Farmers     Electric     Cooperative,     Anadarko,     Okla.,     James     D. 

Pendergrass,  statement  2165 

Weymouth,  George  A.,  Brandywine  Conservancy,  Chadds  Ford,  Pa.,  state- 
ment    1945 

Whillock,  Carl  S.,  Arkansas  Electric  Cooperative  Corp.,  letter  1870 

Williams,  Robert  C,  Jr.,  Columbia  Gas  Development  Corp.,  Houston,  Tex., 

statement  2050 

Williams,  Robert  C,  Meridian  Asset  Management,  Inc.,  Valley  Forge,  Pa., 

letter 1813 

Williamson,  Robert  D.,  American  Society  for  Payroll  Management,  statement  .  1917 

Willis,  Roy  W.,  Independent  Petroleum  Association  of  America,  letter  2080 

Wisconsin  Department  of  Veterans  Affairs,  Daniel  D.  Stier,  letter  2119 

Wise,  Hon.  Bob,  a  Representative  in  Congress  from  the  State  of  West  Vir- 
ginia, letter  and  attachments 2045 

Wood,  Robert  E.,  MDU  Resources  Group,  Inc.,  Bismark,  N.Dak.,  statement  ....  2057 

Worthy,  K.  Martin,  Hopkins  &  Sutter,  Washington,  D.C.,  statement  611 

Young,  J.  Blake,  Jr.,  Bank  South,  NA.,  Atlanta,  Ga.,  letter  1796 

Listing  by  Subject— Revenue  Raisers 


Business  Roundtable,  statement  2233 

National  Society  of  Public  Accountants,  Leroy  A.  Strubberg,  and  Jeffrey  A. 
Lear,  statement  2235 

alternative  minimum  tax 

American  Forest  and  Paper  Association,  statement  (see  listing  under  Multiple 
Issues  heading) 

Coal  Tax  Committee,  statement  2240 

National  Coal  Association,  Richard  L.  Lawson,  statement  2237 


XXIV 

Page 

ACCOUNTING 

American  Bankers  Association,  statement  {see  listing  under  Multiple  Issues 

heading) 
American  Electronics  Association,  statement  (see  listing  under  Multiple  Issues 

heading) 
American  Forest  and  Paper  Association,  statement  (see  listing  under  Multiple 

Issues  heading) 
American  Trucking  Associations,  Inc.,  statement  (see  listing  under  Multiple 

Issues  heading) 

Barth,  James  P.,  North  Bend,  Ohio,  letter  2243 

Black  Entertainment  Television,  Robert  L.  Johnson,  letter  2244 

Burt,  R.L.,  Southampton,  Mass.,  letter  (see  listing  under  Multiple  Issues 

heading) 

Center  for  the  Study  of  Commercialism,  Michael  F.  Jacobson,  letter 2245 

Centex  Corp.,  Dallas,  Tex.,  Richard  C.  Harvey,  letter  (see  listing  under  Mul- 
tiple Issues  heading) 
Danaher  Corp.,  Washington,  D.C.,  James  H.  DitkofF,  letter  and  attachment  ....    2249 

Edwin  L.  Cox  Co.,  Dallas,  Tex.,  J.  Oliver  McGonigle,  letter 2251 

Fisher,  John  J.,  Barrington,  111.,  letter  2252 

Food  Marketing  Institute,  and  International  Mass  Retail  Association,  joint 

statement  2253 

Larsen,  Bryant  &  Porter,  CPA'S,  P.C.,  Lincoln,  Neb.,  Brent  L.  Stehlik,  letter 

(see  listing  under  Multiple  Issues  heading) 

Mattel,  Inc.,  statement  2255 

Miles  Inc.,  Pittsburgh,  Pa.,  Helge  H.  Wehmeier,  letter 2257 

National  Association  of  Enrolled  Agents,  James  E.  Forrester,  statement  (see 

listing  under  Multiple  Issues  heading) 
National  Association  of  Realtors,  statement  (see  listing  under  Multiple  Issues 

heading) 

Ralston  Purina  Co.,  Ronald  B.  Weinel,  statement  and  attachments  2258 

Retail  Tax  Committee  of  Common  Interest,  statement  2263 

Sundquist,  Hon.  Don,  a  Representative  in  Congress  from  the  State  of  Ten- 
nessee, statement  2266 

Tax  Executives  Institute,  Inc.,  Ralph  J.  Weiland,  statement  (see  listing  under 

Multiple  Issues  heading) 
True  Companies,  Casper,  Wyo.,  statement  (see  listing  under  Multiple  Issues 

heading) 
United  States  Telephone  Association,  John  Sodolski,  statement  (see  listing 

under  Multiple  Issues  heading) 

FINANCIAL  INSTITUTIONS 

American  Bankers  Association,  statement  (see  listing  under  Multiple  Issues 
heading) 

Centex  Corp.,  Dallas,  Tex.,  Richard  C.  Harvey,  letter  (see  listing  under  Mul- 
tiple Issues  heading) 

Fidelty  Federal  Bank,  Glendale,  Calif.,  Kathleen  A.  Christianson,  letter 2267 

KPMG  Peat  Marwick,  statement  2268 

COST  RECOVERY 

Kieffer-Nolde,  Chicago,  LI.,  Neil  J.  Schecter,  letter 2278 

Laser  Graphics,  Inc.,  Hillside,  111.,  Steve  Giusti,  letter  2279 

National  Association  of  Water  Companies,  James  L.  (Jood,  statement  2274 

Sundquist,  Hon.  Don,  a  Representative  in  Congress  from  the  State  of  Ten- 
nessee, statement  2280 

Techtron  Imaging  Centre,  Chicago,  111.,  Walter  C.  Pabst,  letter  2281 


XXV 

Page 
INDIVIDUAL  INCOME  TAX 

American  Greyhound  Track  Operators  Association,  Henry  C.  Cashen  and 

John  C.  Dill,  statement  (see  listing  under  Multiple  Issues  heading) 
American  Horse  Council,  Inc.,  statement  (see  listing  under  Multiple  Issues 

heading) 
Americsm  Trucking  Associations,  Inc.,  statement  (see  listing  under  Multiple 

Issues  heading) 
Bilbray,  Hon.  James  H.,  a  Representative  in  Congress  from  the  State  of 

Nevada,  statement  (see  listing  under  Multiple  Issues  heading) 
Bryan,  Hon.  Richard,  a  United  States  Senator  from  the  State  of  Nevada, 

statement  (see  listing  under  Multiple  Issues  heading) 
Burt,  R.L.,  Southampton,  Mass.,  letter  (see  listing  under  Multiple  Issues 

heading) 

Coopers  &  Lybrand,  Washington,  D.C.,  statement  2284 

Customs  Science  Services,  Inc.,  Kensington,  Md.,  Roger  J.  Crain,  letter 2283 

Larsen,  Bryant  &  Porter,  CPA's,  P.C,  Lincoln,  Neb.,  Brent  L.  StehUk,  letter 

(see  listing  under  Multiple  Issues  heading) 
National  Association  for  the  Self-Employed,  Bennie   L.  Thayer,  letter  (see 

listing  under  Multiple  Issues  heading) 
National  Association  of  Enrolled  Agents,  James  E.  Forrester,  statement  (see 

listing  under  Multiple  Issues  heading) 
National  Association  of  Realtors,  statement  (see  listing  under  Multiple  Issues 

heading) 
National  Conference  of  State  Social  Security  Administrators,  Daryl  Dunagan, 

letter  (see  listing  under  Multiple  Issues  heading) 

Nevada  Resort  Association,  David  Belding,  statement  2287 

Reid,  Hon.  Harry,  a  United  States  Senator  from  the  State  of  Nevada,  state- 
ment (see  listing  under  Multiple  Issues  heading) 

SeaWest,  San  Diego,  Calif.,  Thomas  G.  Famham,  letter  2290 

Swavelle/Mill  Creek  Fabrics,  New  York,  N.Y.,  Jeffrey  B.  Kraut,  letter 2282 

True  Companies,  Casper,  Wyo.,  statement  (see  listing  under  Multiple  Issues 

heading) 
United  States  Telephone  Association,  John  Sodolski,  statement  (see  listing 

under  Multiple  Issues  heading) 
Vucanovich,  Hon.  Barbara  F.,  a  Representative  in  Congress  from  the  State 

of  Nevada,  statement  (see  listing  under  Multiple  Issues  heading) 

NATURAL  RESOURCES 

American  Trucking  Associations,  Inc.,  statement  (see  listing  under  Multiple 

Issues  heading) 
Center  for  International  Environmental  Law,  Robert  F.  Housman,  statement  .   2294 

National  Petroleum  Refiners  Association,  Urvan  R.  Stemfels,  letter  2298 

Reid,  Hon.  Harry,  a  United  States  Senator  from  the  State  of  Nevada,  state- 
ment      2291 

True  Companies,  Casper,  Wyo.,  statement  (see  listing  under  Multiple  Issues 
heading) 

FOREIGN  TAX  PROVISIONS 

American  Bankers  Association,  statement  (see  listing  under  Multiple  Issues 
heading) 

American  Electronics  Association,  statement  (see  listing  under  Multiple  Issues 
heading) 

American  Federation  of  Labor  and  Congress  of  Industrial  Organizations,  Rob- 
ert E.  Lucore,  statement 2325 

American  Forest  and  Paper  Association,  statement  (see  listing  under  Multiple 
Issues  heading) 

American  Petroleum  Institute,  statement  (see  listing  under  Multiple  Issues 
heading) 

American  Trucking  Associations,  Inc.,  statement  (see  listing  under  Multiple 
Issues  heading) 

Arthur  Andersen  &  Co.,  Andre  P.  Fogarasi  and  Richard  A.  Gordon,  state- 
ment      2329 

Association  of  British  Insurers,  statement  2339 

Attorneys'  Liability  Assurance  Society,  Inc.,  John  E.  Chapoton  and  Thomas 
A.  Stout,  Jr.,  letter 2345 


XXVI 

Page 

Danaher  Corp.,  Washington,  D.C.,  James  H.  DitkofT,  letter 2337 

Export  Source  Coalition,  Paul  W.  Oosterhuis  and  Roseann  M.  Cutrone,  state- 
ment and  attachments  2299 

International  Tax  Policy  Forum,  Joel  Slemrod,  statement  and  attachment  2309 

Kennelly,  Hon.  Barbara  B.,  a  Representative  in  Congress  from  the  State 

of  Connecticut,  letter  and  attachments  2350 

National  Association  of  Insurance  Brokers,  Michael  J.  Hass,  letter 2364 

Organization  for  International  Investment  Inc.,  Alexander  Spitzer,  statement 
and  attachments  (see  listing  under  Multiple  Issues  heading) 

Public  Securities  Association,  statement  2318 

Reinsurance  Association  of  America,  statement  2366 

Risk  and  Insurance  Management  Society,  Inc.,  Paul  S.  Brown,  letter  2374 

Securities  Industry  Association,  Marc  E.  Lackritz,  statement  2320 

Tax  Executives  Institute,  Inc.,  Ralph  J.  Weiland,  statement  (see  listing  under 

Multiple  Issues  heading) 
United  States  Council  for  International  Business: 

Statement  2312 

Statement  2324 

United  States  Telephone  Association,  John  Sodolskl,  statement  (see  listing 

under  Multiple  Issues  heading) 
United  Technologies,  William  F.  Paul,  letter  2316 

EXCISE  TAXES 

American  Forest  and  Paper  Association,  statement  and  attachment  2399 

American  Horse  Council,  Inc.,  statement  (see  listing  under  Multiple  Issues 

heading) 
American  Trucking  Associations,  Inc.,  statement  (see  listing  under  Multiple 

Issues  heading) 
Asociacion  de  Exportadores  De  Chile  (Chilean  Exporter's  Association),  Ronald 

S.  Bown  F.,  letter  and  attachment  2402 

Association  of  Home  Appliance  Manufacturers,  statement 2407 

Bilbray,  Hon.  James  H.,  a  Representative  in  Congress  from  the  State  of 

Nevada,  statement  (see  listing  under  Multiple  Issues  heading) 
Bryan,  Hon.  Richard,  a  United  States  Senator  from  the  State  of  Nevada, 
statement  (see  listing  under  Multiple  Issues  heading) 

Carrier  Corp.,  Syracuse,  N.Y.,  Edward  A.  Baily,  letter 2409 

Cetylite  Industries,  Inc.,  Pennsauken,  NJ.,  Stanley  L.  Wachman,  statement  ..    2410 

Mack  Trucks,  Inc.,  Mark  Cherry,  statement  and  attachments   2388 

National  Cable  Television  Association,  Decker  Anstrom,  statement  2381 

National  Truck  Equipment  Association,  Michael  E.  Kastner,  letter  and  at- 
tachment      2396 

Nevada  Resort  Association,  David  Belding,  statement  2378 

Newspaper  Association  of  America,  statement  2382 

Organization  for  International  Investment  Inc.,  Alexander  Spitzer,  statement 

and  attachments(sce  listing  under  Multiple  Issues  heading) 
Polyisocyanurate  Insulation  manufacturers  Association,  Jared  O.  Blum,  state- 
ment      2412 

Reid,  Hon.  Harry,  a  United  States  Senator  from  the  State  of  Nevada,  state- 
ment (see  listing  under  Multiple  Issues  heading) 

Renewable  Fuels  Association,  Eric  Vaughn,  statement  2383 

Society  of  the  Plastics  Industry,  Inc.,  Maureen  A.  Healey,  letters  and  attach- 
ments      2416 

Tax  Executives  Institute,  Inc.,  Ralph  J.  Weiland,  statement  (see  listing  under 
Multiple  Issues  heading) 

Truck  Trailer  Manufacturers  Association,  Richard  P.  Bowling,  letter 2398 

True  Companies,  Casper,  Wyo.,  statement  (see  listing  under  Multiple  Issues 

heading) 
United  States  Telephone  Association,  John  Sodolski,  statement  (see  listing 

under  Multiple  Issues  heading) 
Vucanovich,  Hon.  Barbara  F.,  a  Representative  in  Congress  from  the  State 

of  Nevada,  statement  (see  listing  under  Multiple  Issues  heading) 
Whirlpool  Corp.,  Michael  C.  Thompson,  statement  2421 

TAX-EXEMPT  ENTITIES 

Alliance  for  Justice,  Nan  Aron  and  Carol  Siefert,  letter  and  attachment  2431 

American  Association  of  Museums,  Edward  H.  Able,  Jr.,  letter  2436 


XXVII 

Page 

AmericEin  Gas  Association,  statement  (see  listing  under  Multiple  Issues  head- 
ing) 

American  Petroleum  Institute,  statement  (see  listing  under  Multiple  Issues 
heading) 

American  Trucking  Associations,  Inc.,  statement  (see  listing  under  Multiple 
Issues  heading) 

Center  for  Non -Profit  Corporations,  Princeton,  NJ.,  Linda  M.  Czipo,  letter  2438 

Independent  Bankers  Association  of  America,  statement  (see  listing  under 
Multiple  Issues  heading) 

National  Association  of  Convenience  Stores,  statement  (see  listing  under  Mul- 
tiple Issues  heading) 

National  Association  of  Realtors,  statement  (see  listing  under  Multiple  Issues 
heading) 

National  Club  Association,  statement 2423 

National  Panhellenic  Conference,  Harriett  B.  Macht;  National  Pan -Hellenic 
Council,  Inc.,  Daisy  Wood;  and  National  Interfratemity  Conference,  Robert 
D.  Lynd,  joint  statement  and  attachment 2426 

National  Venture  Capital  Association,  Dean  C.  (Jordanier,  Jr.,  letter  2440 

Tax  Executives  Institute,  Inc.,  Ralph  J.  Weiland,  statement  (see  listing  under 
Multiple  Issues  heading) 

True  Companies,  Casper,  Wyo.,  statement  (see  listing  under  Multiple  Issues 
heading) 

United  States  Telephone  Association,  John  Sodolski,  statement  (see  listing 
under  Multiple  Issues  heading) 

COMPLIANCE 

American  Bankers  Association,  statement  (see  listing  under  Multiple  Issues 
heading) 

American  Electronics  Association,  statement  (see  listing  under  Multiple  Issues 
heading) 

American  Forest  and  Paper  Association,  statement  (see  listing  under  Multiple 
Issues  heading) 

American  Gas  Association,  statement  (see  listing  under  Multiple  Issues  head- 
ing) 

American  Greyhound  Track  Operators  Association,  Henry  C.  Cashen  and 
John  C.  Dill,  statement  (see  listing  under  Multiple  Issues  heading) 

American  Horse  Council,  Inc.,  statement  (see  listing  under  Multiple  Issues 
heading) 

American  Land  Title  Association,  Ann  vom  Eigen,  statement  2447 

American  Trucking  Associations,  Inc.,  statement  (see  listing  under  Multiple 
Issues  heading) 

Bilbray,  Hon.  James  H.,  a  Representative  in  Congress  from  the  State  of 
Nevada,  statement  (see  listing  under  Multiple  Issues  heading) 

Bryan,  Hon.  Richard,  a  United  States  Senator  from  the  State  of  Nevada, 
statement  (see  listing  under  Multiple  Issues  heading) 

Burt,  R.L.,  Southampton,  Mass.,  letter  (see  listing  under  Multiple  Issues 
heading) 

Coalition  on  Interest  Disallowance,  statement  2455 

Federation  of  Tax  Administrators,  Harley  T.  Duncan,  statement  and  attach- 
ment      2449 

CJomola,  Gary  R.,  Coughlin  &  Gomola,  Middletown,  Conn.,  letter 2453 

Independent  Bankers  Association  of  America,  statement  (see  listing  under 
Multiple  Issues  heading) 

Larsen,  Bryant  &  Porter,  CPA's,  P.C,  Lincoln,  Neb.,  Brent  L.  Stehlik,  letter 
(see  listing  under  Multiple  Issues  heading) 

Levenson,  Daniel  D.,  Lourie  &  Cutler,  P.C,  Boston,  Mass.,  statement 2461 

National  Association  for  the  Self-Em  ployed,  Bennie  L.  Thayer,  letter  (see 
listing  under  Multiple  Issues  heading) 

National  Association  of  Convenience  Stores,  statement  (see  listing  under  Mul- 
tiple Issues  heading) 

National  Association  of  Enrolled  Agents,  James  E.  Forrester,  statement  (see 
listing  under  Multiple  Issues  heading) 

National  Conference  of  State  Social  Security  Administrators,  Daryl  Dunagan, 
letter  (see  listing  under  Multiple  Issues  heading) 

Nevada  Resort  Association,  David  Belding,  statement  2458 


XXVIII 

Page 

Reid,  Hon.  Harry,  a  United  States  Senator  from  the  State  of  Nevada,  state- 
ment (see  listing  under  Multiple  Issues  heading) 

Tax  Executives  Institute,  Inc.,  Ralph  J.  Weiland,  statement  (see  listing  under 
Multiple  Issues  heading) 

True  Companies,  Casper,  Wyo.,  statement  (see  listing  under  Multiple  Issues 
heading) 

United  States  Telephone  Association,  John  Sodolski,  statement  (see  listing 
under  Multiple  Issues  heading) 

Vucanovich,  Hon.  Barbara  F.,  a  Representative  in  Congress  from  the  State 
of  Nevada,  statement  (see  listing  under  Multiple  Issues  heading) 

MISCELLANEOUS  ISSUES 

Alliance  Exchange  Group,  Inc.,  Santa  Ana,  Calif.,  Deanna  F.  Burton,  letter  ....    2498 
American  Electronics  Association,  statement  (see  listing  under  Multiple  Issues 
heading) 

American  Equity  Exchange,  Inc.,  Dillon,  Mont.,  Max  A.  Hansen,  letter  2499 

American  Forest  and  Paper  Association,  statement  (see  listing  under  Multiple 

Issues  heading) 
American  Gas  Association,  statement  (see  listing  under  Multiple  Issues  head- 
ing) 

American  Land  Title  Association,  Ann  vom  Eigen,  statement  2500 

American  Petroleum  Institute,  statement  (see  listing  under  Multiple  Issues 

heading) 
American  Trucking  Associations,  Inc.,  statement  (see  listing  under  Multiple 
Issues  heading) 

Bishop,  Barbara,  Pasedena,  Calif.,  letter  2502 

Building  and  Construction  Trades  Department,  AFL-CIO,  Robert  A.  Georgine, 

statement  2463 

Coalition  for  Independent  Contractors,  Edward  N.  Delaney  and  Russell  A. 

Hollrah,  statement  2469 

Environcol,  James  C.  (}odbout,  Diane  Herndon,  and  Mary  Frances  Pearson, 

statement  2513 

Equitv  Advantage,  Inc.,  Salem,  Ore.,  Lonnie  C.  Nielson,  Thomas  N.  Moore, 

and  David  S.  Moore,  letter  2503 

Equity  Reserve,  Inc.,  Newport  Beach,  Calif.,  Frank  C.  Huntsman,  letter 2504 

Federation  of  Exchange  Accommodators,  Newport  Beach,  Calif.,  Andrew  G. 

Potter,  letter  2505 

Hulen,  Myron,  Colorado  State  University;  William  Kinny,  Portland  State 
University;  Jack  Robison,  California  Polytechnic  State  University;  and  Mi- 
chael Vaughan,  Colorado  State  University,  joint  statement  2474 

Independent  Fuel  Terminal  Operators  Association,  statement  and  attach- 
ment      2518 

International  Council  of  Shopping  Centers,  Steven  J.  Guttman,  statement  2507 

Lantos,  Hon.  Tom,  a  Representative  in  Congress  from  the  State  of  California, 

statement  1379 

National  Association   for  the  Self-Employed,  Bennie   L.  Thayer,  letter  (see 

listing  under  Multiple  Issues  heading) 
Nationsd  Association  of  Convenience  Stores,  statement  (see  listing  under  Mul- 
tiple Issues  heading) 
National  Association  of  Realtors,  statement  (see  listing  under  Multiple  Issues 
heading) 

National  Federation  of  Independent  Business,  statement  2482 

New  York  Gas  Group,  Donald  F.  Straetz,  statement  2523 

Real  Estate  Exchange,  Inc.,  Portland,  Ore.,  James  C.  Casterline,  letter  2510 

Security  Trust  Co.,  San  Diego,  Calif.,  J.  Paul  Spring,  letter  2512 

Shays,  Hon.  Christopher,  a  Representative  in  Congress  from  the  State  of 

Connecticut,  statement  1382 

Stratford  Technologies,  Inc.,  Somerdale,  NJ.,  William  R.  Patterson,  letter  2490 

Studds,  Hon.   Gerry  E.,  a  Representatives  in  Congress  from  the  State  of 

Massachusetts,  statement  2497 

Tax  Executives  Institute,  Inc.,  Ralph  J.  Weiland,  rtatement  (see  listing  under 

Multiple  Issues  heading) 
True  Companies,  Casper,  Wyo.,  statement  (see  listing  under  Multiple  Issues 

heading) 
United  Brotherhood  of  Carpenters  and  Joiners  of  America,  AFL-CIO,  state- 
ment      2492 


XXIX 

Page 

United  States  Telephone  Association,  John  Sodolski,  statement  (see  listing 
under  Multiple  Issues  heading) 

MULTIPLE  ISSUES 

American  Bankers  Association,  statement  2525 

American  Electronics  Association,  statement  2529 

American  Forest  and  Paper  Association,  statement  2533 

American  Gas  Association,  statement 2535 

American  Greyhound  Track  Operators  Association,  Heniy  C.  Cashen  and 

John  C.  Dill,  statement 2544 

American  Horse  Council,  Inc.,  statement  2546 

American  Petroleum  Institute,  statement  2551 

American  Trucking  Associations,  Inc.,  statement 2560 

Bilbray,  Hon.  James  H.,  a  Representative  in  Congress  from  the  State  of 

Nevada,  statement  2563 

Bryan,  Hon.  Richard,  a  United  States  Senator  from  the  State  of  Nevada, 

statement  2564 

Burt,  R.L.,  Southampton,  Mass.,  letter 2566 

Centex  Corp.,  Dallas,  Tex.,  Richard  C.  Harvey,  letter  2567 

Independent  Bankers  Association  of  America,  statement  2568 

Larsen,  Bryant  &  Porter,  CPA's,  P.C.,  Lincoln,  Neb.,  Brent  L.  Stehlik,  letter  ..  2570 

National  Association  for  the  Self-Employed,  Bennie  L.  Thayer,  letter  2573 

National  Association  of  Convenience  Stores,  statement 2576 

National  Association  of  Enrolled  Agents,  James  E.  Forrester,  statement 2580 

National  Association  of  Realtors,  statement  2583 

National  Conference  of  State  Social  Security  Administrators,  Daryl  Dunagan, 

letter 2587 

Organization  for  International  Investment  Inc.,  Alexander  Spitzer,  statement 

and  attachments 2589 

Reid,  Hon.  Harry,  a  United  States  Senator  from  the  State  of  Nevada,  state- 
ment    2597 

Tax  Executives,  Inc.,  Ralph  J.  Weiland,  statement  2599 

True  Companies,  Casper,  Wyo.,  statement  2609 

United  States  Telephone  Association,  John  Sodolski,  statement  2618 

Vucanovich,  Hon.  Barbara  F.,  a  Representative  in  Congress  from  the  State 

of  Nevada,  statement  2623 

Combined  Listing  by  Name  and  Organizations  (Raisers) 

Able,  Edward  H.,  Jr.,  American  Association  of  Museums,  letter  2436 

Alliance  Exchange  Group,  Inc.,  Santa  Ana,  Calif.,  Deanna  F.  Burton,  letter  ....  2498 

Alliance  for  Justice,  Nan  Aron  and  Carol  Siefert,  letter  and  attachment  2431 

American  Association  of  Museums,  Edward  H.  Able,  Jr.,  letter  2436 

American  Bankers  Association,  statement  2525 

American  Electronics  Association,  statement  2529 

American  Equity  Exchange,  Inc.,  Dillon,  Mont.,  Max  A.  Hansen,  letter  2499 

American  Federation  of  Labor  and  Congress  of  Industrial  Organizations,  Rob- 
ert E.  Lucore,  statement  2325 

American  Forest  and  Paper  Association: 

Statement  and  attacnment  2399 

Statement  2533 

American  Gas  Association,  statement 2535 

American  Greyhound  Track  Operators  Association,  Henry  C.   Cashen  and 

John  C.  DiU,  statement 2544 

American  Horse  Council,  Inc.,  statement  2546 

American  Land  Title  Association,  Ann  vom  Eigen: 

Statement  2447 

Statement  2500 

American  Petroleum  Institute,  statement  2551 

American  Trucking  Associations,  Inc.,  statement 2560 

Anstrom,  Decker,  National  Cable  Television  Association,  statement  2381 

Aron,  Nan,  Alliance  for  Justice,  letter  and  attachment  2431 

Arthur  Andersen  &  Co.,  Andre  P.  Fogarasi  and  Richard  A.  Gordon,  state- 
ment    2329 

Asociacion  de  Exportadores  De  Chile  (Chilean  Exporter's  Association),  Ronald 

S.  Bown  F.,  letter  and  attachment  2402 

Association  of  British  Insurers,  statement 2339 


XXX 

Page 

Association  of  Home  Appliance  Manufacturers,  statement 2407 

Attorneys'  Liability  Assurance  Society,  Inc.,  John  E.  Chapoton  and  Thomas 

A.  Stout,  Jr.,  letter  2345 

Baily,  Edward  A.,  Carrier  Corp.,  Syracuse,  N.Y,,  letter 2409 

Barth,  James  P.,  North  Bend,  Ohio,  letter  2243 

Belding,  David,  Nevada  Resort  Association: 

Statement  2287 

Statement  2378 

Statement  2458 

BUbray,  Hon.  James  H.,  a  Representative  in  Congress  from  the  State  of 

Nevada,  statement  2563 

Bishop,  Barbara,  Pasedena,  Calif.,  letter  2502 

Black  Entertainment  Television,  Robert  L.  Johnson,  letter  2244 

Blum,    Jared    O.,    Polyisocyanurate    Insulation   Manufacturers   Association, 

statement  2412 

Bowling,  Richard  P.,  Truck  Trailer  Manufacturers  Association,  letter 2398 

Bown  F.,  Ronald  S.,  Asociacion  de  Exportadores  De  Chile  (Chilean  Exporter's 

Association),  letter  and  attachment 2402 

Brown,  Paul  S.,  Risk  and  Insurance  Management  Society,  Inc.,  letter  2374 

Bryan,  Hon.  Richard,  a  United  States  Senator  from  the  State  of  Nevada, 

statement  2564 

Building  and  Construction  Trades  Department,  AFL-CIO,  Robert  A.  Georgine, 

statement  2463 

Burt,  R.L.,  Southampton,  Mass.,  letter 2566 

Burton,  Deanna  F.,  Alliance  Exchange  Group,  Inc.,  Santa  Ana,  Calif.,  letter  ...  2498 

Business  Roundtable,  statement  2233 

Carrier  Corp.,  Syracuse,  N.Y.,  Edward  A.  Baily,  letter 2409 

Cashen,  Henry  C,  American  Greyhound  Track  Operators  Association,  state- 
ment    2544 

Casterline,  James  C,  Real  Estate  Exchange,  Inc.,  Portland,  Ore.,  letter  2510 

Center  for  International  Environmental  Law,  Robert  F.  Housman,  statement  .  2294 

Center  for  Non-Profit  Corporations,  Princeton,  N.J.,  Linda  M.  Czipo,  letter  2438 

Center  for  the  Study  of  Commercialism,  Michael  F.  Jacobson,  letter 2245 

Centex  Corp.,  Dallas,  Tex.,  Richard  C.  Harvey,  letter  2567 

Cetylite  Inaustries,  Inc.,  Pennsauken,  N.J.,  Stanley  L.  Wachman,  statement  ..  2410 

Chapoton,  John  E.,  Attorneys'  Liability  Assurance  Society,  Inc.,  letter  2345 

Cherry,  Mark,  Mack  Trucks,  Inc.,  statement  and  attachments  2388 

Christianson,  Kathleen  A.,  Fidelty  Federal  Bank,  Glendale,  Calif.,  letter  2267 

Coal  Tax  Committee,  statement  2240 

Coalition  for  Independent  Contractors,  Edward  N.  Delaney  and  Russell  A. 

Holb-ah,  statement  2469 

Coalition  on  Interest  Disallowance,  statement  2455 

Coopers  &  Lybrand,  Washington,  D.C.,  statement  2284 

Customs  Science  Services,  Inc.,  Kensington,  Md.,  Robert  J.  Grain,  letter  2283 

Cutrone,  Roseann  M.,  Export  Source  Coalition,  statement  and  attachments  ....  2299 

Czipo,  Linda  M.,  Center  for  Non-Profit  Corporations,  Princeton,  N.J.,  letter  ....  2438 
Danaher  Corp.,  Washington,  D.C.,  James  H.  Ditkoff: 

Letter 2249 

Letter 2337 

Delaney,  Edward  N.,  Coalition  for  Independent  Contractors,  statement  2469 

Dill,  John  C,  American  Greyhound  Track  Operators  Association,  statement  ...  2544 
Ditkoff,  James  H.,  Danaher  Corp.,  Washington,  D.C.: 

Letter  2249 

Letter  2337 

Dunagan,  Daryl,  National  Conference  of  State  Social  Security  Administrators, 

letter 2587 

Duncan,  Harley  T.,  Federation  of  Tax  Administrators,  statement  and  attach- 
ment    2449 

Edwin  L.  Cox  Co.,  Dallas,  Tex.,  J.  Oliver  McGonigle,  letter 2251 

Environcol,  James  C.  Godbout,  Diane  Hemdon,  and  Mary  Frances  Pearson, 

statement  2513 

Equity  Advantage,  Inc.,  Salem,  Ore.,  Lonnie  C.  Nielson,  Thomas  N.  Moore, 

and  David  S.  Moore,  letter  2503 

Equity  Reserve,  Inc.,  Newport  Beach,  Calif.,  Frank  C.  Huntsman,  letter 2504 

Export  Source  Coalition,  Paul  W.  Oosterhuis  and  Roseann  M.  Cutrone,  state- 
ment and  attachments  2299 

Famham,  Thomas  G.,  SeaWest,  San  Diego,  Calif.,  letter  2290 


XXXI 

Page 

Federation  of  Exchange  Accommodators,  Newport  Beach,  Calif.,  Andrew  G. 

Potter,  letter  2505 

Federation  of  Tax  Administrators,  Harley  T.  Duncan,  statement  and  attach- 
ment    2449 

Fidelty  Federal  Bank,  Glendale,  Calif.,  Kathleen  A.  Christiansen,  letter 2267 

Fisher,  John  J.,  Barrineton,  111.,  letter  2252 

Fogarasi,  Andre  P.,  Artnur  Andersen  &  Co.,  statement  2329 

Food  Marketing  Institute,  and  International  Mass  Retail  Association,  joint 

statement  2253 

Forrester,  James  E.,  National  Association  of  Enrolled  Agents,  statement  2580 

Georgine,  Robert  A.,  Building  and  Construction  Traifes  Department,  AFL- 

CIO,  statement  2463 

Giusti,  Steve,  Laser  Graphics,  Inc.,  Hillside,  111.,  letter  2279 

Godbout,  James  C,  Environcol,  statement 2513 

Gomola,  Gary  R.,  Coughlin  &  Gomola,  Middletown,  Conn.,  letter 2453 

Good,  James  L.,  National  Association  of  Water  Companies,  statement  2274 

Gordanier,  Dean  C,  Jr.,  National  Venture  Capital  Association,  letter  2440 

Gordon,  Richard  A.,  Arthur  Andersen  &  Co.,  statement  2329 

Guttman,  Steven  J.,  International  Council  of  Shopping  Centers,  statement  2507 

Hansen,  Max  A.,  American  Equity  Exchange,  Inc.,  Dillon,  Mont.,  letter  2499 

Harvey,  Richard  C,  Centex  Corp.,  Dallas,  Tex.,  letter  2567 

Hass,  Michael  J.,  National  Association  of  Insurance  Brokers,  letter  2364 

Healey,  Maureen  A.,  Society  of  the  Plastics  Industry,  Inc.,  letters  and  attach- 
ments    2416 

Hemdon,  Diane,  Environcol,  statement 2513 

HoUrah,  Russell  A.,  Coalition  for  Independent  Contractors,  statement  2469 

Housman,  Robert  F.,  Center  for  International  Environmental  Law,  statement  2294 
Hulen,  MjTX)n,   Colorado  State  University;  William  Kinny,  Portland  State 
University;  Jack  Robison,  California  Polytechnic  State  University;  and  Mi- 
chael Vaughan,  Colorado  State  University,  joint  statement  2474 

Huntsman,  Frank  C,  Equity  Reserve,  Inc.,  Newport  Beach,  Calif.,  letter 2504 

Independent  Bankers  Association  of  America,  statement  2568 

Independent  Fuel  Terminal  Operators  Association,   statement  and  attach- 
ment    2518 

International  Council  of  Shopping  Centers,  Steven  J.  Guttman,  statement  2507 

International  Mass  Retail  Association,  and  Food  Marketing  Institute,  joint 

statement  2253 

International  Tax  Policy  Forum,  Joel  Slemrod,  statement  and  attachment  2309 

Jacobson,  Michael  F.,  Center  for  the  Study  of  Commercialism,  letter 2245 

Johnson,  Robert  L.,  Black  Entertainment  Television,  letter  2244 

Kastner,  Michael  E.,  National  Truck  Equipment  Association,  letter  and  at- 
tachment    2396 

Kennelly,  Hon.  Barbara  B.,  a  Representative  in  Congress  from  the  State 

of  Connecticut,  letter  and  attachments  2350 

Kiefler-Nolde,  Chicago,  Bl.,  Neil  J.  Schecter,  letter 2278 

Kinny,  William,  Portland  State  University,  joint  statement  (see  listing  for 
Myron  Hulen) 

KPMG  Peat  Marwick,  statement  2268 

Kraut,  Jeffrey  B.,  Swavelle/Mill  Creek  Fabrics,  New  York,  N.Y.,  letter 2282 

Lackritz,  Marc  E.,  Securities  Industry  Association,  statement  2320 

Lantos,  Hon.  Tom,  a  Representative  in  Congress  from  the  State  of  California, 

statement  1379 

Larsen,  Bryant  &  Porter,  CPA's,  P.C,  Lincoln,  Neb.,  Brent  L.  Stehlik,  letter  ..  2570 

Laser  Graphics,  Inc.,  Hillside,  Bl.,  Steve  Giusti,  letter  2279 

Lawson,  Richard  L.,  National  Coal  Association,  statement  2237 

Lear,  Jeffrey  A.,  National  Society  of  Public  Accountants,  statement 2235 

Levenson,  Daniel  D.,  Lourie  &  Cutler,  P.C,  Boston,  Mass.,  statement 2461 

Lucore,  ELobert  E.,  American  Federation  of  Labor  and  Congress  of  Industrial 

Organizations,  statement  2325 

Lynd,  Robert  D.,  National  Interfratemitv  Conference,  joint  statement  and 

attachment  (see  listing  for  National  Panhellenic  Conference) 
Macht,  Harriett  B.,  National  Panhellenic  Conference,  joint  statement  and 

attachment 2426 

Mack  Trucks,  Inc.,  Mark  Cherry,  statement  and  attachments  2388 

Mattel,  Inc.,  statement  2255 

McGonigle,  J.  Oliver,  Edwin  L.  Cox  Co.,  Dallas,  Tex.,  letter 2251 

Miles  Inc.,  Pittsburgh,  Pa.,  Helge  H.  Wehmeier,  letter 2257 

Moore,  David  S.,  Equity  Advantage,  Inc.,  Salem,  Ore.,  letter 2503 


XXXII 

Page 

Moore,  Thomas  N.,  Eguity  Advantage,  Inc.,  Salem,  Ore.,  letter  2503 

National  Association  for  the  Self-Employed,  Bennie  L.  Thayer,  letter  2573 

National  Association  of  Convenience  Stores,  statement 2576 

National  Association  of  Enrolled  Agents,  James  E.  Forrester,  statement  2580 

National  Association  of  Insurance  Brokers,  Michael  J.  Hass,  letter  2364 

National  Association  of  Realtors,  statement  2583 

National  Association  of  Water  Companies,  James  L.  Good,  statement  2274 

National  Cable  Television  Association,  Decker  Anstrom,  statement  2381 

National  Club  Association,  statement 2423 

National  Coal  Association,  Richard  L.  Lawson,  statement  2237 

National  Conference  of  State  Social  Security  Administrators,  Daryl  Dunagan, 

letter 2587 

National  Federation  of  Independent  Business,  statement  2482 

National  Panhellenic  Conference,  Harriett  B.  Macht;  National  Pan-Hellenic 
Council,  Inc.,  Daisy  Wood;  and  National  Interfratemity  Conference,  Robert 

D.  Lynd,  joint  statement  and  attachment  2426 

National  Petroleum  Refiners  Association,  Urvan  R.  Stemfels,  letter 2298 

National  Society  of  Public  Accountants,  Leroy  A.  Strubberg,  and  Jeffrey  A. 

Lear,  statement  2235 

National  Truck  Equipment  Association,  Michael  E.  Kastner,  letter  and  at- 
tachment    2396 

National  Venture  Capital  Association,  Dean  C.  Gordanier,  Jr.,  letter  2440 

Nevada  Resort  Association,  David  Belding: 

Statement  2287 

Statement  2378 

Statement  2458 

New  York  Gas  Group,  Donald  F.  Straetz,  statement  2523 

Newspaper  Association  of  America,  statement  2382 

Nielson,  Lonnie  C,  Equity  Advantage,  Inc.,  Salem,  Ore.,  letter  2503 

Oosterhuis,  Paul  W.,  Export  Source  Coalition,  statement  and  attachments 2299 

Organization  for  International  Investment  Inc.,  Alexander  Spitzer,  statement 

and  attachments 2589 

Pabst,  Walter  C,  Techtron  Imaging  Centre,  Chicago,  HI.,  letter  2281 

Patterson,  William  R.,  Stratford  Technologies,  Inc.,  Somerdale,  N.J.,  letter  2490 

Paul,  William  F.,  United  Technologies,  letter  2316 

Pearson,  Mary  Frances,  Environcol,  statement  2513 

Polyisocyanurate  Insulation  Manufacturers  Association,  Jared  O.  Blum,  state- 
ment    2412 

Potter,  Andrew  G.,  Federation  of  Exchange  Accommodators,  Newport  Beach, 

Calif.,  letter 2505 

Public  Securities  Association,  statement  2318 

Ralston  Purina  Co.,  Ronald  B.  Weinel,  statement  and  attachments  2258 

Real  Estate  Exchange,  Inc.,  Portland,  Ore.,  James  C.  Casterline,  letter  2510 

Reid,  Hon.  Harry,  a  United  States  Senator  from  the  State  of  Nevada: 

Statement  2291 

Statement  2597 

Reinsurance  Association  of  America,  statement  2366 

Renewable  Fuels  Association,  Eric  Vaughn,  statement  2383 

Retail  Tax  Committee  of  Common  Interest,  statement 2263 

Risk  and  Insurance  Management  Society,  Inc.,  Paul  S.  Brown,  letter  2374 

Robison,  Jack,  California  Polytechnic  State  University,  joint  statement  (see 
listing  for  Myron  Hulen) 

Schecter,  Neil  J.,  Kieffer-Nolde,  Chicago,  111.,  letter 2278 

SeaWest,  San  Diego,  Calif.,  Thomas  G.  Famham,  letter  2290 

Securities  Industry  Association,  Marc  E.  Lackritz,  statement  2320 

Security  Trust  Co.,  San  Diego,  Calif.,  J.  Paul  Spring,  letter  2512 

Shays,  Hon.  Christopher,  a  Representative  in  Congress  from  the  State  of 

Connecticut,  statement  1382 

Siefert,  Carol,  Alliance  for  Justice,  letter  and  attachment  2431 

Slemrod,  Joel,  International  Tax  Policy  Forum,  statement  and  attachment  2309 

Society  of  the  Plastics  Industry,  Inc.,  Maureen  A.  Healey,  letters  and  attach- 
ments    2416 

Sodolski,  John,  United  States  Telephone  Association,  statement  2618 

Spitzer,  Alexander,  Organization  for  International  Investment  Inc.,  statement 

and  attachments 2589 

Spring,  J.  Paul,  Security  Trust  Co.,  San  Diego,  Calif.,  letter  2512 

Stehl&,  Brent  L.,  Ursen,  Bryant  &.  Porter,  CPA's,  P.C,  Lincoln,  Neb.,  letter  .  2570 

Stemfels,  Urvan  R.,  National  Petroleum  Refiners  Association,  letter  2298 


XXXIII 

Page 

Stout,  Thomaa  A.,  Jr.,  Attorneys'  Liability  Assurance  Society,  Inc.,  letter  2345 

Straetz,  Donald  F.,  New  York  Gas  Group,  statement  2523 

Stratford  Technologies,  Inc.,  Somerdale,  NJ.,  William  R.  Patterson,  letter  2490 

Strubberc,  Leroy  A.,  National  Society  of  Public  Accountants,  statement 2235 

Studds,  Hon.  Gerry  E.,  a  Representative  in  Congress  from  the  State  of  Massa- 
chusetts, statement  2497 

Sundquist,   Hon.   Don,    a   Represeiitative   in   Congress   from  the   State   of 
Tennessee: 

Statement  2266 

Statement  2280 

Swavelle/Mill  Creek  Fabrics,  New  York,  N.Y.,  Jeffrey  B.  Kraut,  letter 2282 

Tax  Executives  Institute,  Inc.,  Ralph  J.  Weiland,  statement  2599 

Techtron  Ima^ng  Centre,  Chicago,  111.,  Walter  C.  Pabst,  letter  2281 

Thayer,  Bennie  L.,  National  Association  for  the  Self-Employed,  letter  2573 

Thompson,  Michael  C,  Whirlpool  Corp.,  statement  2421 

Truck  Trailer  Manufacturers  Association,  Richard  P.  Bowling,  letter 2398 

True  Companies,  Casper,  Wyo.,  statement  2609 

United  Brotherhood  of  Carpenters  and  Joiners  of  America,  AFL#-CIO,  state- 
ment    2492 

United  States  Council  for  International  Business: 

Statement  2312 

Statement  2324 

United  States  Telephone  Association,  John  Sodolski,  statement  2618 

United  Technologies,  William  F.  Paul,  letter  2316 

Vaughan,  Michael,  Colorado  State  University,  joint  statement  (see  listing 
for  Myron  Hulen) 

Vaughn,  Eric,  Renewable  Fuels  Association,  statement  2383 

vom  Eigen,  Ann,  American  Land  Title  Association,  statement  2500 

Vucanovich,  Hon.  Barbara  F.,  a  Representative  in  Congress  from  the  State 

of  Nevada,  statement  2623 

Wachman,  Stanley  L.,  Cetylite  Industries,  Inc.,  Pennsauken,  NJ.,  statement  .  2410 

Wehmeier,  Helge  H.,  Miles  Inc.,  Pittsburgh,  Pa.,  letter 2257 

Weiland,  Ralph  J.,  Tax  Executives  Institute,  Inc.,  statement  2599 

Weinel,  Ronald  B.,  Ralston  Purina  Co.,  statement  and  attachments  2258 

Whirlpool  Corp.,  Michael  C.  Thompson,  statement  2421 

Wood,  Daisy,  National  Pan-Hellenic  Council,  Inc.,  joint  statement  and  attach- 
ment (see  listing  for  National  Panhellenic  Conference) 


77-130  0 -94 -2 


MISCELLANEOUS  REVENUE  ISSUES 


WEDNESDAY,  SEPTEMBER  8,  1993 

House  of  Representatives, 
Committee  on  Ways  and  Means, 
Subcommittee  on  Select  Revenue  Measures, 

Washington,  D.C. 

The  subcommittee  met,  pursuant  to  call,  at  10:05  a.m.,  in  room 
1100,  Longworth  House  Office  Building,  Hon.  Charles  B.  Rangel 
(chairman  of  the  subcommittee)  presiding. 

Chairman  Rangel.  Good  morning. 

The  Subcommittee  on  Select  Revenue  Measures  will  resume  its 
series  of  hearings  on  miscellaneous  revenue  issues.  Earlier  this 
year,  we  conducted  four  hearings  focused  on  these  matters.  All  of 
those  were  the  revenue-losing  issues.  We  will  consider  additional 
testimony  today  on  other  miscellaneous  items.  This  time  we  will 
concentrate  on  those  issues  that  raise  revenue. 

As  those  of  you  who  are  familiar  with  the  committee  are  aware, 
Chairman  Rostenkowski  and  our  committee  have  a  strong  commit- 
ment to  deficit  reduction  and  responsible  fiscal  policv.  In  keeping 
with  long  tradition,  any  miscellaneous  issue  that  the  committee 
brings  up,  the  member  must  offset  it  by  an  appropriate  revenue- 
raising  item.  So  we  have  to  do  both,  raise  the  issue  and  find  out 
how  we  are  going  to  pay  for  it.  Those  suggested  revenue  raisers 
will  be  the  subject  of  today's  hearing  and  again  on  September  21 
we  will  review  or  return  to  this  issue. 

We  will  hear  from  public  witnesses  in  the  following  areas:  the  al- 
ternative minimum  tax,  accounting,  financial  institution  costs,  re- 
covery pass-through  entities,  individual  taxes,  natural  resources 
issue,  and  tax-exempt  entities.  On  the  second  day  of  the  hearings, 
Treasury  is  expected  to  testify  on  these  issues,  which  will  be  Sep- 
tember 21. 

At  this  point,  I  would  like  to  recognize  the  ranking  member  of 
the  subcommittee,  Mel  Hancock  for  whatever  opening  remarks  he 
has  to  make. 

Mr.  Hancock.  Thank  you,  Mr.  Chairman. 

Today  we  will  hear  testimony  from  a  wide  variety  of  witnesses 
on  a  number  of  revenue-raising  proposals  before  this  subcommittee. 
As  you  remember,  the  committee  spent  several  weeks  this  summer 
considering  the  revenue-losing  provisions  which  constituted  the 
easv  part  of  the  miscellaneous  tax  bill's  journey  through  the  Ways 
and  Means  Committee. 

Many  items  discussed  in  the  previous  hearings  made  good  sense 
and  many  should  be  enacted  into  law,  but  when  you  look  at  the  list 
of  revenue  raisers  we  have  before  us  today,  and  the  additional 

(1055) 


1056 

items  we  will  discuss  later  this  month,  one  has  to  ask:  Do  the  bene- 
fits derived  fi-om  this  process  outweigh  the  burdens  placed  on  indi- 
viduals and  businesses  through  the  so-called  revenue-raising  off- 
sets? 

One  merely  has  to  look  at  this  list  of  offsets  to  see  that  the  bur- 
den on  individuals  and  business  will  be  great,  in  my  opinion  much 
greater  than  any  benefits  provided  through  this  process.  What  is 
worse,  these  new  tax  proposals  come  1  month  after  the  President 
signed  into  law  a  new  massive  tax  plan,  which  will  affect  nearly 
every  individual  and  business  in  this  country. 

The  effects  of  this  process  appear  to  be  just  as  grave.  Not  only 
will  these  numerous  provisions  increase  direct  costs  to  individuals 
and  businesses,  the  cost  of  complying  with  these  complicated  pro- 
posals could  be  astoundingly  high.  Limiting  deductions,  lengthen- 
ing recovery  periods,  and  stretching  out  amortization  schedules  are 
the  methods  of  choice  in  raising  this  revenue. 

Few  of  these  proposals  contain  the  characteristics  of  sound  tax 
policy,  and  several  make  no  sense  at  all.  Many  were  conceived  with 
no  concern  for  their  effect  on  those  who  will  be  impacted,  but  mere- 
ly as  a  means  to  finance  other  provisions  of  the  bill.  In  these  times 
of  slow  economic  growth  and  on  the  heels  of  the  largest  tax  in- 
crease in  history,  we  should  not  seriously  be  considering  the  items 
before  us  today. 

While  at  first  glance  the  items  we  will  explore  today  may  seem 
minor,  let  me  assure  you,  Mr.  Chairman,  they  are  very  important 
to  those  who  will  be  affected  and  could  hold  disastrous  economic 
consequences.  I  think  it  is  some  sort  of  dichotomy  that  yesterday 
the  Vice  President  released  an  administration  proposal  to  reinvent 
Government  through  consolidation  and  simplification.  Now  here  we 
are  today. 

I  encourage  my  colleagues  on  this  panel  to  listen  carefully  to  the 
witnesses  who  will  testify  before  us,  many  of  whom  have  already 
sacrificed  under  the  President's  tax  bill.  At  the  end  of  this  long  day, 
it  should  be  clear  to  all  that  the  burdens  mandated  through  this 
process  outweigh  any  benefits  which  may  exist. 

Mr.  Chairman,  this  is  the  first  day  back  from  a  vacation  and  I 
wish  we  had  held  this  up  for  a  few  more  days  because  this  is  not 
something  I  want  to  address  this  quickly  after  a  pleasant  30  days 
away  from  here.  I  know  it  has  to  be  done,  but  let's  seriously  con- 
sider what  we  are  doing  and  consider  the  impact  that  this  is  going 
to  have  on  the  people  who  are  going  to  end  up  paying  these  addi- 
tional taxes. 

Chairman  Rangel.  If  your  district  had  the  problems  that  my  dis- 
trict had,  you  would  recognize  the  vacation  starts  today  for  me.  I 
am  glad  to  be  back  here. 

Does  anyone  seek  recognition? 

We  have  a  panel  before  us  led  by  Hon.  Walter  Tucker  concerning 
a  project  that  the  committee  is  anxious  to  hear  about  in  the  sov- 
ereign State  of  California.  We  welcome  all  members  of  the  delega- 
tion. 

Ms.  Allard  is  here.  Mr.  Horn  is  here.  Ms.  Waters  is  expected,  and 
Congress  woman  Harman  is  here.  As  others  arrive,  they  will  be 
recognized. 


1057 

STATEMENT  OF  HON.  WALTER  R.  TUCKER  HI,  A  REPRESENTA- 
TIVE IN  CONGRESS  FROM  THE  STATE  OF  CALIFORNIA 

Mr.  Tucker.  Thank  you,  Mr.  Chairman  and  distinguished  mem- 
bers of  the  committee. 

Again  thank  you  for  hearing  us  today  and  recognizing  this  dele- 
gation that  is  concerned  about  alternative  financing  for  a  project 
called  the  Alameda  Corridor.  Before  I  give  background  on  the  Ala- 
meda Corridor,  I  would  like  to  have  entered  into  the  record  a  for- 
mal statement  which  I  will  extrapolate  from. 

Chairman  Rangel.  Without  objection. 

Mr.  Tucker.  Thank  you,  Mr.  Chairman. 

I  believe  members  of  the  committee  do  have  a  packet  and  com- 
prised within  the  packet  is  also  a  map,  which  may  be  of  use  to 
them  in  following  some  of  my  commentary  about  the  overall  make- 
up of  what  is  called  the  Alameda  Corridor  Project.  This  project  was 
initiated  by  the  Alameda  Corridor  Transportation  Authority  com- 
prised of  local  communities  stretching  from  downtown  L.A.  to  the 
port  of  Los  Angeles  and  the  port  of  Long  Beach,  a  20-mile  stretch. 

Those  two  ports  combined  comprise  the  largest  port  facility  in 
the  country  and  the  third  largest  in  the  world.  They  generate  100 
million  tons  annuallv  and  they  are  obviously  a  very  great  source 
of  exportation  over  tne  Pacific  Rim  which,  as  we  heard  during  the 
campaign,  is  the  most  prodigious  source  of  exports  for  this  country. 

This  particular  project  came  about  as  a  result  of  a  concern  to 
consolidate  and  a  concern  to  become  more  efficient.  There  are  cur- 
rently three  separate  railroads  using  four  different  routes  to  move 
cargo  between  downtown  L.A.  and  the  ports,  resulting  in  inefficien- 
cies and  environmental  problems. 

The  additional  cost  to  shippers,  who  must  put  up  with  delays  in 
transportation  and  transshipment  of  cargo  destined  for  the  East 
Coast  and  other  points,  is  becoming  difficult  to  justify.  Even  as  we 
speak,  there  are  reports  about  a  possible  construction  of  a  port  in 
Mexico  in  the  Baja  Peninsula,  which  would  create  some  kind  of 
competition  for  the  ports  of  Los  Angeles  and  Long  Beach. 

In  light  of  a  lot  of  impending  discussions  and  negotiations  on 
NAFTA,  this  may  or  may  not  bring  such  competition  to  fruition. 
We  are  trying  to  come  up  with  alternative  financing  to  better  the 
facilities  at  the  ports  of  Los  Angeles  and  Long  Beach;  in  other 
words,  the  Alameda  Corridor.  The  issue  is  a  question  of  how  we 
can  possibly  come  up  with  tax-exempt  bond  financing. 

In  IRS  Code  section  142(c),  there  is  language  as  to  the  ability  to 
have  tax-exempt  bond  financing  for  ports  and  docks  and  wharves 
including  airports.  Our  submission  to  this  distinguished  committee 
is  that  that  particular  code  section  be  amended  to  include  transpor- 
tation and  port-related  facilities,  such  as  the  Alameda  Corridor  not 
exclusive  to  the  Alameda  Corridor,  but  certainly  exemplary  of  the 
Alameda  Corridor. 

We  believe  that  this  is  a  natural  extension,  physical,  legal  and 
practical  of  the  port  and  thereby  not  in  any  way  thwarting  or  un- 
dermining the  intent  of  the  law,  the  intent  of  the  code  as  written. 
For  that  reason,  we  believe  that  such  an  amendment  should  be 
made. 

Mind  you,  even  as  the  chairman  indicated  about  the  economic 
problems  all  over  the  country,  we  understand  that  in  New  York,  in 


1058 

New  Jersey,  and  other  parts  of  the  country,  port  facilities  are  also 
undergoing  expansion  and  progress,  whether  they  are  on  our  time- 
table or  not.  Such  amendment  we  believe  would  be  advantageous 
and  beneficial  to  such  projects  throughout  the  whole  country,  not 
exclusive  just  to  California.  But  as  it  relates  to  statistics  as  to  Cali- 
fornia, we  can  share  with  you  at  this  point  that  the  projection  is 
that  700,000  more  jobs  would  be  created  in  California  by  the  year 
2020.  ^^^^^^ 

Of  course,  some  people  have  said-as  California  goes,  so  goes  the 
country.  But  the  importance  of  this  particular  project  is  that  it  has 
national  implications  inasmuch  as  we  are  talking  about  the  better- 
ment and  enhancement  of  trade  on  a  national  basis.  Once  again, 
the  project  will  consolidate  rail  traffic  and  the  total  project  would 
be  estimated  to  cost  $1.8  billion.  We  have  looked  at  and  you  will 
see  in  our  written  statement,  we  have  looked  at  the  possibility  of 
highway  funds. 

We  have  looked  at  the  possibility  of  funds  by  the  different  ports; 
in  fact,  the  ports  have  already  put  up  hundreds  of  millions  of  dol- 
lars for  the  betterment  of  this  project,  $400  million  contribution  to 
be  specific.  Eight  million  dollars  is  expected  from  other  local,  State 
and  Federal  sources.  There  remains  a  $600  million  shortfall  and 
this  is  why  we  are  coming  to  this  committee  to  look  at  it  these  al- 
ternative sources. 

The  language  of  the  proposed  agreement  to  the  Internal  Revenue 
Code  would  permit  the  issuance  of  tax-exempt  bonds  by  the  Ala- 
meda Corridor  Transportation  Authority  for  the  purpose  of  upgrad- 
ing the  20-mile  consolidated  rail  and  highway  corridor  that  we  say 
is  an  extension  of  the  physical  port  itself  Once  again,  this  Alameda 
Corridor  Transportation  Authority,  that  we  call  ACTA,  is  a  public 
entity  and  therefore  a  public  entity  will  in  fact  own  the  corridor  au- 
thority and  in  fact  then  come  within  the  governmental  guidelines, 
if  you  will,  of  the  IRS  142(c)  language. 

The  language  of  the  amendment  is  entirely  consistent  with  the 
public  policy  underlying  the  ability  to  issue  tax-exempt  bonds  to  fi- 
nance ports  because  it  covers  only  facilities  that  are  integral  to  op- 
erations of  the  ports  and  dedicated  to  those  operations. 

I  might  also  add  that  this  project  has  received  national  support 
from  the  American  Association  of  Port  Authorities.  This  project  has 
also  received  bipartisan  support  from  Republicans  and  Democrats 
alike.  I  might  cite  a  dear  colleague  letter  that  is  included  in  the 
packet  that  has  just  about  every  signature  of  the  members  of  the 
California  delegation,  crossing  all  party  lines. 

In  summary,  Mr.  Chairman  and  members  of  the  committee,  we 
would  ask  that  you  look  very  closely  at  this.  We  understand  that 
there  have  been  numbers  projected  that  this  might  cost  $115  mil- 
lion over  5  years,  but  that  our  share  would  be  measurably  less 
than  that. 

I  am  sure  that  one  of  the  first  questions  that  you  will  raise  is 
how  will  we  pay  for  this.  I  am  sure  your  committee  is  in  the  busi- 
ness of  working  out  those  kinds  of  details.  But  we  are  here  today 
to  get  the  ball  rolling  initially  to  say  that  this  is  a  project  of  na- 
tional and  international  import  and  hopefully  export  too,  and  that 
we  believe  that  it  is  important  to  get  this  going  now  to  look  at  al- 


1059 

temative  financial  and  financing  sources  and  we  believe  the  tax- 
exempt  bond  financing  would  be  one  of  the  best  ways  to  do  it. 

Let  me  add,  I  am  joined  by  another  distinguished  member  of  the 
California  delegation,  Ms.  Waters.  We  want  to  welcome  her  as  part 
of  this  delegation. 

At  this  time,  I  would  like  to  turn  it  over  to  Congresswoman 
Lucille  Roybal-Allard. 

[The  prepared  statement  and  attachments  follow:] 


1060 
(CoxiQxt^i  of  tfje  Winitth  ^tatt^ 

J^oviie  of  iRcpregcntatibeff 
3Ba£f)tng:ton.  BC  20515 

Written  Testimony  of 

The  Honorable  Walter  R.  Tucker  III 

The  Honorable  Steve  Horn 

The  Honorable  Lucille  Roybal-Allard 

The  Honorable  Maxine  Waters 

The  Honorable  Jane  Harman 

The  Honorable  Xavier  Becerra 

Before  the  Subconunittee  on  Select  Revenue  Measures 
Conunittee  on  Ways  and  Means 
September  8,  1993 

Good  morning,  Mr.  Chairman,  and  Members  of  the  Committee.  We  are 
here  today  in  support  of  a  proposed  amendment  to  Section  142(c)  of 
the  Internal  Revenue  Code  to  allow  exempt  facility  bonds  to  be 
issued  for  certain  transportation  facilities  (including  trackage 
and  rail  facilities)  used  for  the  transport  of  cargo  or  passengers 
mainly  to  or  from  airports,  docks,  or  wharves,  regardless  of 
whether  the  facilities  meet  the  governmental  ownership  requirement 
of  Code  section  142(b)(1). 

While  the  proposed  amendment  could  potentially  affect  projects 
around  the  Country,  we  would  like  to  address  its  significance  to  a 
specific  project  with  which  we  are  very  familiar  --  the  Alameda 
Transportation  Corridor.  This  20  mile  corridor  passes  through  our 
districts  as  it  runs  from  downtown  Los  Angeles  to  the  San  Pedro 
Bay  Ports,  the  largest  port  complex  in  the  United  States. 

We  have  attached  for  the  record  a  report  that  outlines  the  full 
scope  of  this  project.  However,  we  would  like  to  tell  you  just 
enough  about  it  to  demonstrate  why  the  amendment  has  national 
significance  even  if  it  were  to  apply  to  this  project  alone. 

The  Alameda  Corridor  Project 

The  Alameda  Corridor  Project  was  initiated  by  the  Alameda  Corridor 
Transportation  Authority  and  an  EIR  funded  by  the  Authority  was 
certified  January  14  of  this  year.  The  objective  of  the  project 
is  to  consolidate  rail  traffic  along  the  Alameda  Street  route  that 
extends  from  the  main  rail  yards  in  downtown  Los  Angeles  to  the 
two  ports  of  Los  Angeles  and  Long  Beach.  Currently,  three 
separate  railroads  use  four  different  routes  to  move  their  cargo 
between  downtown  and  the  ports.  The  inefficiencies  and 
environmental  problems  associated  with  the  current  practice  is 
unacceptable  not  only  to  the  people  who  live  and  work  in  this  area 
but  to  the  competitive  position  of  the  United  States  in  World 
markets.  The  additional  cost  to  shippers  who  must  put  up  with 
delays  in  the  transhipment  of  cargo  destined  for  the  East  Coast 
and  other  points  is  becoming  increasingly  difficult  to  justify  and 
there  are  already  reports  that  Mexico  is  hoping  to  attract  foreign 


1061 


capital  to  the  Baja  Peninsula  for  the  purpose  of  constructing  a 
port  to  compete  with  the  San  Pedro  Bay  Ports. 

Currently,  cargo  volumes  through  the  port  complex  amount  to 
roughly  100  million  tons  annually,  and  in  a  study  completed  by  the 
U.S.  Army  Corps  of  Engineers  on  behalf  of  the  two  ports,  these 
totals  are  projected  to  double  by  the  year  2020.  Indeed  a  new 
coal  shipping  agreement  signed  just  recently  opens  the  way  to 
dramatically  increase  the  flow  of  U.S.  coal  through  the  ports  to 
Japan  in  the  short  term. 

Mr.  Chairman,  we  must  make  the  surface  transportation  systems 
serving  our  ports  competitive  if  we  are  to  protect  our  foreign 
trade  status  in  the  World  economy.  At  the  same  time  we  have  to  be 
mindful  of  the  impact  these  systems  have  on  the  local  communities 
and  work  to  make  them  compatible  with  their  surrounding 
communities.  In  the  case  of  the  consolidation  of  the  three 
railroads  on  the  Alameda  corridor,  90  miles  of  tracks  crossing  198 
roads  at  grade  level  and  having  a  direct  impact  on  71,000  people 
whose  residences  are  within  500  feet  of  the  rail  line  would  be 
reduced  to  20  miles  of  track,  with  zero  grade  crossings  and 
directly  affecting  only  7,900  people  whose  residences  are  within 
500  feet  of  the  line.  These  are  dramatic  improvements  that  will 
significantly  improve  the  efficiency  of  the  ports  and  the  quality 
of  life  for  the  people  who  live,  work  and  travel  the  Alameda 
Corridor.  As  a  demonstration  of  the  broad  support  for  the  Alameda 
Corridor  Project,  we  have  attached  a  letter  signed  by  46  Members 
of  the  California  Congressional  Delegation  supporting  a  request 
for  federal  funding. 

Tax-Exempt  Bond  Eligibility 

Under  current  law  (section  142  of  the  Code)  dock  and  wharf 
facilities  are  eligible  for  tax-exempt  financing.  Though  the 
facilities  generally  must  be  included  in  the  public  port's 
jurisdiction,  they  are  not  limited  solely  to  the  actual  dock  or 
wharf  facilities  but  include  facilities  which  are  functionally 
related  and  subordinate  to  the  dock  or  wharf.  Nevertheless,  the 
Authority  has  been  advised  by  legal  counsel  that  rail  facilities 
to  transport  cargo  into  and  out  of  a  port,  even  though  dedicated 
to  handling  public  port  cargo,  are  not  a  dock  or  wharf  or 
functionally  related  and  subordinate  to  it.  Therefore,  a  rail  and 
highway  corridor  project  such  as  the  Alameda  Corridor  Project  does 
not  appear  to  be  eligible  for  tax-exempt  financing  at  this  time. 

Our  legal  counsel  has  further  determined  that  the  language  of  the 
proposed  amendment  to  the  Internal  Revenue  Code  would  permit  the 
issuance  of  tax-exempt  bonds  by  the  Alameda  Corridor 
Transportation  Authority  for  the  purpose  of  upgrading  the  20  mile 
consolidated  rail  and  highway  corridor.  We  feel  that  the  language 
of  the  amendment  is  entirely  consistent  with  the  public  policy 
underlying  the  ability  to  issue  tax-exempt  bonds  to  finance  ports 
because  it  covers  only  facilities  that  are  integral  to  the 
operations  of  the  ports  and  dedicated  to  those  operations;  under 
the  amendment  80  percent  of  the  utilization  of  the  project  must  be 
directly  connected  to  port  activity.   Consequently,  we  are  asking 


1062 


that  your  Committee,  Mr.  Chairman,  adopt  the  proposed  sunendment 
thereby  setting  in  motion  one  of  the  most  significant  intermodal 
transportation  projects  in  the  Country. 

Project  Funding  Plan 

Mr.  Chairman,  the  total  cost  of  the  Corridor  consolidation  and 
upgrading  has  been  set  at  $1.8  billion.  Already  the  San  Pedro  Bay 
Ports  have  committed  $400  million  toward  the  right-of-way 
acquisition  and  project  construction.  The  Metropolitan 
Transportation  Authority  has  just  recently  committed  $8  million  in 
local  sales  tax  dollars  for  engineering.  In  addition  to  these 
local  commitments,  four  of  the  grade  crossings  on  the  corridor 
were  authorized  for  partial  federal  funding  under  the  Intermodal 
Surface  Transportation  and  Efficiency  Act  (ISTEA). 

Local,  state  and  federal  highway  funds  will  be  used  to  fund  $800 
million  in  highway  improvements  and  grade  crossings  along  the 
corridor.  While  not  all  such  funding  can  be  identified  in  the 
current  five  year  local  funding  cycle  or  ISTEA  authorization,  we 
are  confident  that  subsequent  extensions  of  ISTEA  authorization 
will  provide  the  federal  funding  that  we  feel  is  appropriate  for 
this  project.  Indeed  there  is  a  very  good  chance  that  the  highway 
segment  of  the  Alameda  Corridor  Project  will  be  included  in  the 
National  Highway  System  when  Congress  completes  its  review  in 
1995.  Once  included  we  are  relatively  assured  that  the  project 
can  be  completed  by  our  target  date  of  the  year  2000. 

Nevertheless,  even  with  the  Ports'  $400  million  contribution  and 
the  $800  million  expected  from  other  local.  State  and  federal 
sources,  there  remains  a  $600  million  shortfall.  The  State  of 
California  has  given  the  Alameda  Corridor  Transportation  Authority 
the  ability  to  issue  bonds  for  the  purpose  of  improving  the  rail 
and  highway  corridor.  The  Authority  is  prepared  to  take  such 
action,  but  Mr.  Chairman,  it  desperately  needs  authority  to  issue 
tax-exempt  bonds. 

Consequently,  we  have  come  before  this  Committee  to  support  an 
amendment  that  would  give  the  Authority  the  ability  to  issue  these 
bonds,  which  would  be  repaid  from  port  and  corridor  user  charges 
and  fees. 

Mr.  Chairman,  you  have  be^n  most  generous  in  taking  our  proposal 
under  consideration,  and  in  your  deliberations  on  this  tax  bill  we 
think  you  will  find  that  the  merits  of  our  position  are 
compelling.  Indeed,  we  feel  that  this  project  can  become  a 
national  model  that  demonstrates  the  willingness  of  all  levels  of 
government  to  work  in  concert  toward  a  mutual  goal  with  truly 
global  economic  significance. 


1063 


llameda  Corridor  Update 


On  Januaiy  14,  1993,  the  Goveniing  Board  of  the  Alameda  Coiridor  Transportation  Authority 
(ACTA)  certified  the  I^nal  Environmental  Impact  Repoit  and  foimally  adopted  the  Alameda 
Corridor  project  Hie  action,  which  was  unanimous,  signifies  a  strong  regional  consensus  that  Ae 
Alameda  Coiridor  should  be  built.  Approximatdy  20  miles  in  length,  the  project  is  designed  to 
facilitate  rail  and  highway  access  to  the  ports  of  Los  Angeles  and  Long  Beach,  while  mitigating 
potentially  adverse  impacts  of  the  ports'  growth,  including  highway  traffic  congestion,  air  pollution, 
vehicle  delays  at  grade  crossings,  and  noise  in  residential  areas. 


Railroad  Component 


The  goal  of  the  railroad  component  of  the  Alameda  Corridor  is  to  consolidate  the  movements  of  the 
Union  Pacific,  Sanu  Fe,  and  Southern  Pacific  Railroads  onto  an  unproved  right-of-way  parallel  to 
Alameda  Street  South  of  Route  9 1  the  railroad  impro  vanents  will  be  at-grade  with  east-west  grade 
separations.  Between  Route  9 1  and  25th  Street  the  raUway  will  be  depressed,  with  the  tracks  in  a 
trench,  33  feet  deep  and  47  feet  wide.  East-west  streets  will  bndge  straight  across  this  trench. 


Highway  Component 


South  of  Route  91: 

The  Ports  Access  Demonstrauon  Project  (PADP),  the  first  phase  of  the  Alameda  Corridor,  will 
widen  Heniy  Ford  Avenue  and  Alameda  Street  from  four  to  six  lanes  between  the  Tenninal  Island 
Freeway  and  Route  9 1 .  The  PADP  also  includes  east-west  grade  separations  at  Camsn  Street  and 
DelAjHoBoukvanL 

The  PADP  has  been  funded  with  federal  giants  in  1982, 1987,  and  1 99 1 .  The  Intenooodal  Surface 
Transportation  Efficiency  Act  (ISTEA)  includes  additional  funds  for  grade  separations  at  Pacific 
Coast  Highway,  Squitveda  Boulevard,  Anaheim  Street,  and  Alameda  Street  near  Laurel  Park  Road. 
Funding  for  a  freeway  interchange  at  the  intersection  of  the  Terminal  Island  Freeway  and  Ocean 
Boulevard  is  also  included  in  the  legislation. 


1064 


Qiameda  Corridor  Update 


North  of  Route  91: 

Alameda  Street,  from  the  Artesia  Freeway  (SR  91)  to  the  Santa  Monica  Freeway  (I-IO),  will  be 
reconstructed  with  the  existing  number  of  through  lanes,  thus  maintaining  little  Alameda  Street  on 
the  east  side  of  the  railroad  tracks  and  main  Alameda  Street  on  die  west  side  of  the  tracks.  This 
would  include  alternative  traffic  engineering  solutions,  such  as  left  turn  pockets  alongmain  Alameda 
Street  and  new  signahzation  at  all  existing  crossings.  No  light-of-way  would  be  taken  along  the  cast 
or  west  side  of  Alameda  Street  that  would  result  in  acquisition  of  buildings  or  create  a  non- 
conforming use. 


The  project  will  cost  about  $1.8  billion  in  inflated  dollars. 


Railroad  Agreements 


On  August  18,  1993  the  Port  of  Los  Angeles  terminated  the  agreement  with  Southern  Pacific  to 
purchase  the  property  needed  for  the  Alameda  Corridor.  The  Port  of  Long  Beach  withdrew  from 
the  agreement  on  Septanber  1,  1993.  The  ports  have  reaffirmed  their  suppon  for  the  project,  but 
have  stated  that  more  time  is  needed  to  resolve  issues  of  title  and  clean-up  of  hazardous  materials 
along  the  corridor.  An  operating  agreement  with  all  three  railroad  companies  has  also  not  been 
completed.  All  parties  are  woiking  diligently  to  resolve  tte  remaining  issues. 


Financing 


To  date,  approximately  S535  million  has  been  committed  for  the  project  from  federal,  state,  local 
and  port  sources.  Remaining  funds  will  come  from  future  government  grants,  revenue  bonds 
supported  by  the  users  of  Ae  coiridor,  and  other  sources.  Depending  on  the  availabQity  of  funds, 
the  project  may  be  constructed  in  phases.  The  goal,  however,  is  to  complete  the  project  by  the  year 
2000. 


m 


1065 


liameda  Corridor  Update 


Benefits  of  the  Project 


Increased  Economic  Activity 

■  The  Alameda  Coihdor  will  allow  the  poits  of  Los  Angeles  and  Long  Beach  to 
expand.  Port  growth  is  expected  to  generate  700,000  more  jobs  throughout  Southem 
California  by  the  year  2020. 

■  Because  of  improved  access  along  the  Comdor,  redevelopment  opportunities  will 
be  enhanced. 

■  The  Alameda  Corridor  project  itself  will  generate  about  10,000  construction-related 
jobs  in  the  central  Los  Angeles  area. 

■  The  corridor  traverses  several  communities  that  were  hit  hard  by  the  recent  civil 
unrest.  The  project  is  an  important  element  in  the  effort  to  rebuild  Los  Angeles. 

Aedoced  Freeway  Congestion/Improved  Freeway  Safety 

■  The  Alameda  Comdor  will  facilitate  the  development  of  near-dock  and  on-dock  rail 
systems,  reducmg  truck  traffic  on  firccways  and  improving  roadway  safety. 

■  The  Alameda  Corridor  will  divert  truck  traffic  to  Alameda  Street,  which  will  further 
reduce  truck  traffic  on  the  freeways. 

Reduced  Noise  and  Traffic  Delays 

■  The  project  will  result  in  an  estimated  90  percent  reduction  m  tram-related  noise  in 
residential  areas. 

■  The  Alameda  Comdor  will  lead  to  a  90  percem  reduction  in  train-related  traffic 
delays,  eliminating  some  14,000  vehicle  hours  of  delay  by  the  year  2020,  due  to  the 
rerouting  of  trains  and  elimination  of  grade  crossmgs. 


.Q 


1066 


llameda  Corridor  Update 


Improved  Railroad  Operations 

a  The  project  wiU  result  in  an  esdmaied  30  p»canreductuHi  in  train  operating  hours, 
and  a  75  percent  reliction  in  the  number  of  times  trains  have  to  stop  for  other  trains 
to  pass.  (Stopped  trains  cause  severe  traffic  tie-ups  on  streets) 

■  Train  speeds  will  increase  from  10-20  miles  per  hour  to  30-40  miles  per  hour. 
Improved  Air  Quality 

■  Smoother  flowing  freeways  and  a  reduction  in  truck  traffic  will  reduce  vehicular 


The  reducti<»  in  traffic  delays  at  grade  crossings  will  fijother  reduce  emissions. 
Railroad  emissions  (mostly  NOx)  will  be  reduced  by  28%. 


The  project  increases  the  feasibility  for  eleccification  of  the  rail  lines,  which  will 
also  reduce  *^rp^yvoT|.s. 


For  addicional  information,  please  call  or  wnce 

Gill  Hicks.  General  Manager 

Alameda  Corridor  Transpornacion  Auchorlcy 

6550  Miles  Avenue,  Room  I  I  3 

Huntington  Park.  CA  90255 

(213)583-3080 


.a 


1067 


The  Alameda  Corridor 


1068 


WALTER  R.  TUCKER.  IM 


PUBLIC  WORKS  *H0  thanspobtahom 

COMMITTU  ON  SMALL  BUSINtSS 

(EongreHS  of  ttie  United  ^otes 

KouBc  of  SepreHentatiuea 

9aBt}{nglan.  BCH  20315 

May  28,  1993 

Honorable  Bob  Can- 
Chairman,  House  Appropriations 
Subcommittee  on  Transportation 

Dear  Mr. 


We  are  writing  to  request  a  $10  million  appropriation  from  your  subcommittee  for  FY 
1994  for  the  Alameda  Corridor.  These  funds,  in  combination  with  $16  million  in  local  and 
state  funding,  would  be  committed  to  preliminary  engineering,  program  management,  and 
final  design  woric  for  the  Corridor.  The  Alameda  Corridor  Transportation  Authority  has 
completed  work  on  the  subcommittee's  funding  criteria. 

The  Alameda  Corridor  concept  will  be  a  new,  state-of-the-art,  and  world-class  truck  and 
rail  seaport  access  transportation  line,  stretching  some  20  miles  from  the  Los  Angeles/Long 
Beach  port  complex  to  rail  yards  in  East  Los  Angeles.  As  you  know,  the  combined  port 
complex  of  Los  Angeles  and  Long  Beach  is  the  largest  in  the  nation  and  the  third  largest 
in  the  world.  Its  Customs  District  is  the  largest  customs  contributor  in  the  nation,  with 
annual  revenue  exceeding  $4  billion.  An  estimated  363,000  Jobs  depend  on  the  Ports' 
activity. 

As  you  know,  both  ports  are  now  engaged  hi  ambitious  expansion  activities  hi  order  to 
fuUill  the  identified  capacity  needs  of  tiie  21st  Century.  Yet,  the  Ports  must  have  a  i 
to  move  cargo  efficiently  in  and  out  of  the  port  complex  if  the  benefits  of  the  ( 
activities  are  to  be  realhed.   Simply  put,  the  largest  port  complex  in  the  nation  i 
on  the  successful  construction  and  operation  of  the  Alameda  Corridor  if  they 
continue  to  fuUiQ  their  role  of  economic  engines  for  the  region  and  for  the  nation. 

The  Alameda  Corridor  has  the  bacUng  of  Governor  Pete  Wilson,  Senator  Dianne 
Feinstein,  Senator  Barbara  Boxer,  The  California  Transportation  Commission,  the  Ports 
of  Los  Angeles  and  L<»g  Beach,  the  Southern  California  Association  of  Govemmoits,  the 
Los  Angeles  County  Transportation  Commission,  and  numerous  tocal  and  state  oRIdals. 

Federal  investments  in  the  Alameda  Corridor  will  have  substantial  returns.  Esthnated 
annual  customs  revenue  after  completion  of  the  port  expansion  projects  Is  esthnated  to  be 
$12  billion  by  the  year  2020.  WhOe  the  Ports  and  tiie  State  of  California  are  both 
committed  to  providing  substantial  funds  for  the  Corridor,  federal  help  is  necessary  to 
bring  tiliis  project  to  fruition.  We  can  thmk  of  few  other  projects  which  wOl  nilflll  the 
faitermodal  visioa  of  the  Inteimodal  Surface  Transportation  EfBdency  Act  of  1991.  We 
hope  your  subcommittee  can  support  the  Alameda  Corridor.  Fhially,  we  would  like  to 
extend  an  invitatioa  to  you  to  come  and  visit  the  Corridor  personally  so  that  you  can  see 
the  need  for,  and  potemHal  of,  this  critical  transportation  line. 


1069 

We  thank  you  for  your  time  and  consideration  of  tliis  request. 


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1072 

STATEMENT  OF  HON.  LUCILLE  ROYBAL-ALLARD,  A 
REPRESENTATIVE  IN  CONGRESS  FROM  THE  STATE  OF 
CALIFORNIA 

Ms.  Roybal-Allard.  Thank  you,  Mr.  Chairman,  for  the  oppor- 
tunity to  appear  before  you  today  in  support  of  granting  tax-exempt 
bond  status  to  the  Alameda  Corridor  Project.  This  project  will  have 
significant  economic  benefits  for  both  the  country  and  the  southern 
California  region.  I  recently  had  the  opportunity  to  fly  over  the 
project  site  with  Secretary  Pena.  Viewing  the  project  from  that 
vantage  point  clearly  illustrated  how  the  project  will  link  the  two 
ports  of  Los  Angeles  and  Long  Beach,  improve  their  transportation 
infrastructure  and  create  the  Nation's  largest  seaport  complex. 

National  economic  benefits  will  be  delivered  to  the  Congress  that 
can  be  scored  by  the  CBO.  Accordingly,  the  national  importance  of 
this  project  must  be  underscored.  The  two  ports  currently  handle 
about  100  million  metric  tons  of  goods  annually  for  shipment 
throughout  the  Nation.  The  expansion  in  port  capacity  generated 
by  the  project  will  significantly  improve  both  port  access  and  cargo 
transportation. 

This  is  not  simply  a  regional  project.  It  represents  an  effort  to 
maintain  our  Nation's  trade  competitiveness  in  the  face  of  in- 
creased competition  from  Mexico  and  other  international  ports.  The 
project's  surface  transportation  system  improvements  are  needed  to 
keep  our  ports  competitive  in  the  world  economy. 

The  economic  development  benefits  from  this  project  on  a  local 
level  are  considerable  as  well.  Cargo  volume  for  the  ports  is  pro- 
jected to  reach  210  million  tons  by  the  year  2020.  This  growth  will 
generate  700,000  jobs  throughout  southern  California  and  over  2 
million  nationally.  The  project  will  also  generate  approximately 
10,000  construction  jobs  in  the  Los  Angeles  area  and  help  to  revi- 
talize the  local  economy. 

California  has  always  served  as  a  weather  vane  for  the  rest  of 
the  country.  The  entire  Nation  will  benefit  through  the  improved 
economy  of  California.  The  project  will  also  have  important  envi- 
ronmental benefits  by  reducing  traffic  congestion  and  air  pollution. 
Presently  three  railroad  companies  use  four  different  tracks  cross- 
ing at  grade  level,  thereby  directly  impacting  thousands  of  resi- 
dents living  within  500  feet  of  those  lines. 

The  Alameda  Corridor  Project  will  reduce  the  number  of  tracks 
to  a  single  major  line  with  zero  grade  crossings  and  dramatically 
mitigate  their  impact  upon  local  residents.  The  project  will  reduce 
train-related  noise  in  residential  areas  by  90  percent  and  signifi- 
cantly reduce  truck  traffic  on  local  freeways.  The  rail  transpor- 
tation system  will  be  streamlined  and  made  more  cost-effective 
through  a  large  reduction  in  train  operating  hours. 

The  Alameda  Corridor  Project  will  promote  local,  regional  and 
national  economic  development  in  transportation  planning.  Tax- 
exempt  bond  status  is  critical  to  the  continued  construction  of  the 
project.  We  must  not  lose  this  opportunity  to  improve  our  transpor- 
tation infrastructure  and  trade  competitiveness. 

Thank  you. 

Mr.  Tucker.  Thank  you,  Mr.  Chairman. 

Any  questions  for  Ms.  Allard? 


1073 

Chairman  Rangel.  We  would  like  to  hear  from  the  entire  panel, 
and  if  there  are  questions,  anyone  can  decide  who  would  respond. 
Mr.  Tucker.  Thank  you,  Mr.  Chairman. 
At  this  time  I  will  turn  it  over  to  Congresswoman  Harman. 

STATEMENT  OF  HON.  JANE  HARMAN,  A  REPRESENTATIVE  IN 
CONGRESS  FROM  THE  STATE  OF  CALIFORNIA 

Ms.  Harman.  Thank  you,  Mr.  Chairman  and  thank  you,  Mr. 
Hancock,  for  permitting  us  all  to  testify  on  a  bipartisan  basis. 

I  am  the  designated  lawyer  on  this  committee  who  will  address 
in  a  little  more  detail  the  tax-exempt  financing  questions.  I  hope 
if  you  have  questions  for  me,  you  will  refer  them  to  my  colleagues 
first. 

Let  me  underscore  several  points  which  have  already  been  made. 
First  of  all,  the  Alameda  Corridor  will  be  publicly  owned  by  the 
Corridor  Authority. 

Second,  80  percent  or  more  of  the  use  of  the  corridor  will  be  for 
the  port.  We  want  to  make  sure  the  committee  understands  this  in 
connection  with  our  request  for  tax-exempt  financing.  We  have 
been  advised  by  legal  counsel  that  rail  facilities  to  transport  cargo 
into  and  out  of  a  port,  even  though  dedicated  to  handling  public 
port  cargo,  are  not  a  dock  or  wharf  or  functionally  related  and  sub- 
ordinate to  it.  It  is  for  this  reason  that  we  are  seeking  the  amend- 
ment, because  we  believe  that  what  we  have  is  not  eligible  for  tax- 
exempt  financing  at  this  time.  Should  that  opinion  be  different,  we 
would  be  very  happy,  but  we  believe  it  cannot  be  different. 

The  language  of  the  proposed  amendment  to  the  Internal  Reve- 
nue Code  would  permit  the  issuance  of  tax-exempt  bonds  by  the  Al- 
ameda Corridor  Transportation  Authority,  ACTA,  a  public  author- 
ity for  the  purpose  of  upgrading  the  20-mile  consolidated  rail  and 
highway  corridor. 

Under  the  amendment,  80  percent  of  the  utilization  of  the  project 
must  be  directly  connected  to  port  activities.  Let  me  point  out  tnat 
this  is  not  a  California  amendment.  This  is  a  generic  amendment 
and  it  could  potentially  affect  projects  around  the  country.  It  is 
supported  by  the  American  Association  of  Port  Authorities  for  this 
reason  and  we  understand  that  they  will  be  submitting  a  statement 
in  support  for  the  record. 

Points  have  already  been  made  about  the  national  significance  of 
this.  This  is  the  largest  port  complex  in  the  United  States  even  as 
it  stands  today.  There  is  no  real  alternative  on  the  West  Coast  for 
entry  and  exit  of  goods  and  the  real  alternative  on  the  West  Coast, 
if  we  don't  permit  upgrading  in  some  reasonable  way  in  the  short 
term,  will  be  Mexico.  Then  we  will  be  building  Mexican  jobs  rather 
than  American  jobs,  not  just  in  California,  but  as  these  goods  come 
in  and  out  all  across  the  United  States  and  specifically  benefiting 
many  of  our  East  Coast  ports. 

I  am  looking  at  you,  Mr,  Chairman,  thinking  about  the  ports  of 
New  York  and  New  Jersey,  which  can  logically  be  an  entry  and  exit 
point  for  the  same  goods  we  are  talking  about  entering  and  exiting 
this  new  expanded  facility.  Tax-exempt  financing  will  permit  reve- 
nue-raising of  a  piece  of  the  $1.8  billion  that  we  need  for  this  ex- 
pansion. It  will  build  jobs  across  the  United  States  and  enable  us 
effectively  to  compete  with  what  we  expect  will  be  an  expanded  and 


1074 

very,  very  dangerous  competitor  to  our  south  in  Mexico  in  terms  of 
denying  U.S.  jobs  and  building  jobs  in  another  country. 

Thank  you. 

Let  me  add  one  thing.  Mr.  Hancock  asked:  "Do  the  benefits  de- 
rived outweigh  the  burdens?"  I  want  to  answer  that  with  a  re- 
sounding yes. 

Mr.  Tucker.  Thank  you. 

Also  let  me  add,  Mr.  Chairman,  onto  that  aspect  of  her  presen- 
tation, that  $224  million  in  savings  would  occur  with  tax-exempt 
financing  as  opposed  with  taxable  bonds  over  30  years  on  this 
project. 

I  would  like  to  turn  it  over  now  to  Congressman  Steve  Horn. 

STATEMENT  OF  HON.  STEPHEN  HORN,  A  REPRESENTATIVE  IN 
CONGRESS  FROM  THE  STATE  OF  CALIFORNIA 

Mr.  Horn.  Thank  you  very  much. 

As  has  been  noted  by  several  witnesses,  this  is  a  national  project. 
It  is  generic  for  other  future  projects.  I  think  the  committee  should 
know  that  right  now  the  ports  of  Los  Angeles  and  Long  Beach  gen- 
erate $1  billion  in  terms  of  revenue  in  terms  of  customs  and  by  the 
year  2020,  which  is  the  end  of  the  overall  port  plan  for  both  ports, 
there  will  be  roughly  $5  billion  in  revenue  coming  into  the  Federal 
Treasury. 

This  is  the  major  access  point  for  trade  from  and  to  Asia,  and 
this  is  also  going  to  do  a  lot  to  improve  the  lives  of  thousands  of 
citizens  along  these  train  tracks.  It  brings  together  three  railroads 
in  one  corridor  that  go  transcontinental  and  cover  every  one  of  the 
States  now  represented  on  this  committee  so  that  they  can  go  right 
up  to  take  the  containers  off  the  ships  and  eliminate  most  of  the 
truck  traffic  except  for  regional  southern  California. 

In  terms  of  the  total  financing  of  the  project,  the  total  cost  is  esti- 
mated at  $1.8  billion.  The  two  ports,  the  port  of  Long  Beach  and 
the  port  of  Los  Angeles,  the  so-called  San  Pedro  Bay  ports,  have 
committed  $400  million  toward  right-of-way  acquisition  and  project 
construction.  The  Metropolitan  Transportation  Authority  of  the  re- 
gion, Los  Angeles  County  primarily,  has  committed  $8  million  in 
local  sales  tax  dollars  for  engineering.  Four  of  the  35  grade  cross- 
ings on  the  corridor  have  already  been  authorized  in  the  Inter- 
modal  Surface  Transportation  and  Efficiency  Act,  which  the  Con- 
gress approved  last  year.  The  local,  State  and  Federal  highway 
funds  will  be  used  to  fund  $800  million  in  highway  improvements 
and  grade  crossings  along  the  corridor,  and  that  will  improve  the 
lives  of  roughly  60,000  to  70,000  citizens  where  the  traffic  disrupts 
their  lives. 

Although  not  all  the  funding  has  been  identified  yet  in  the  high- 
way sector  because  some  might  be  in  future  bills  passed  by  the 
Congress,  there  is  a  very  good  chance  that  the  highway  segment 
will  be  included  in  the  national  highway  system  when  Congress 
completes  that  review  in  1995. 

Even  with  the  $400  million  contribution  of  the  ports,  the  $800 
million  and  more  expected  from  local.  State  and  Federal  sources, 
there  remains  that  $600  million  shortfall.  That  is  why  the  delega- 
tion— and  you  have  in  the  official  filing  of  our  testimony  a  letter 
I  believe  signed  by  48  of  the  52  members  of  the  delegation — is  ask- 


1075 

ing  for  this  generic  authority  with  which  we  could  issue  tax-exempt 
bonds  which  would  be  retired  based  on  the  fees  collected  by  the 
board  from  the  rail  and  the  truck  traffic  that  will  be  going  in  and 
out  of  the  port. 

So  we  hope  that  you  will  grant  that  to  the  authority,  the  ability 
to  issue  tax-exempt  bonds  that  would  be  repaid  over  the  next  sev- 
eral decades. 

I  would  now  like  to  ask  my  colleague  Maxine  Waters  to  wrap  up 
the  discussion. 

STATEMENT  OF  HON.  MAXINE  WATERS,  A  REPRESENTATIVE 
IN  CONGRESS  FROM  THE  STATE  OF  CALIFORNIA 

Ms.  Waters.  Thank  you  very  much. 

I  am  extremely  pleased  to  join  my  southern  California  colleagues 
at  this  hearing  to  speak  on  behalf  of  the  Alameda  Corridor  Project. 
The  Alameda  Corridor  Project,  if  fully  funded  and  constructed, 
promises  to  be  an  efficient,  productive,  and  resourceful  addition  to 
the  entire  southern  California  economy. 

While  the  benefits  of  this  program  would  be  regional  indeed,  na- 
tional in  scope,  they  would  be  a  direct  link  to  my  own  congressional 
district,  the  35th  Congressional  District.  The  project  would  run 
through  my  congressional  district  at  two  points,  following  Alameda 
Street  between  Jefferson  Boulevard  and  Slawson  Boulevard  and 
again  on  Alameda  between  79th  and  91st  Streets. 

In  these  areas  the  Alameda  Corridor  would  substantially  im- 
prove the  living  conditions  of  many  of  my  constituents,  who  cur- 
rently live  within  500  feet  of  the  3  operating  rail  lines.  This  would 
be  true  all  along  the  corridor  and  would  affect  literally  thousands 
of  southern  California  residents. 

In  my  brief  presentation,  I  would  like  to  focus  on  the  economic 
impact  of  the  project  in  southern  California.  By  way  of  background, 
it  is  important  to  talk  about  the  state  of  the  southern  California 
economy  overall.  The  State  of  California  is  mired  in  a  3-year  reces- 
sion which  has  already  cost  800,000  jobs.  Military  downsizing  and 
other  global  economic  factors  have  taken  a  disproportionate  toll  in 
California  and  in  our  region  in  particular.  The  overall  unemploy- 
ment in  the  State  still  is  over  10  percent  and  worse  along  the  cor- 
ridor, leaving  1.4  million  people  out  of  work.  In  many  parts  of 
southern  California  that  would  be  touched  by  the  Alameda  Cor- 
ridor, unemployment  rates  are  indeed  much,  much  higher. 

Since  1989,  Los  Angeles  County  has  lost  40,000  high-tech  manu- 
facturing jobs  due  to  military  downsizing.  This  translates  into  $1.5 
billion  in  lost  wages  in  the  county. 

It  is  against  this  backdrop  that  we  approach  the  huge  economic 
and  competitive  potential  of  the  Alameda  Corridor  Project.  First, 
construction  of  the  Alameda  Corridor  alone  will  generate  an  esti- 
mated 10,000  jobs  in  the  central  Los  Angeles  area.  The  improved 
efficiency  of  the  new  corridor  will  dramatically  expand  import  op- 
portunities by  the  entire  region,  a  region  that  is  threatened  by 
tough  economic  competition  from  Mexico.  This  could  lead  to  hun- 
dreds of  thousands  of  new  jobs,  up  to  700,000  by  the  year  2020,  ac- 
cording to  some  estimates. 


1076 

The  benefits  fi'om  the  increased  use  of  the  Long  Beach  and  Los 
Angeles  ports  would  lead  to  expanded  development  opportunities  as 
weU. 

Finally,  the  area  is  trying  desperately  to  rebuild.  We  stand  to 
gain  enormously  from  the  Alameda  Corridor  Project,  as  it  would 
cut  through  some  of  the  most  economically  deprived  sections  of  L.A. 
County. 

In  conclusion,  Mr.  Chairman  and  members,  the  proposed  Ala- 
meda Corridor  Project  can  work.  All  we  need  is  a  simple  change  in 
the  tax  law  to  get  the  program  off  the  ground.  I  hope  you  and  this 
committee  will  help  us  realize  the  enormous  economic  potential  of 
this  very  worthwhile  program. 

Thank  you  very  much,  Mr.  Chairman. 

Mr.  Tucker.  I  believe  that  concludes  our  presentation,  Mr. 
Chairman. 

Chairman  Rangel.  Thank  you. 

Where  is  this  project?  Is  this  a  State-operated  project?  Will  the 
State  be  in  charge?  This  is  a  subdivision  of  the  State  government 
that  is  going  to  operate  the 

Mr.  Tucker.  It  is  operated  by  the  Alameda  Corridor  Transpor- 
tation Authority,  which  is  a  body  that  has  been  given  jurisdiction 
on  a  local  basis,  but  it  derives  from  the  State,  yes. 

Chairman  Rangel.  So  they  are  private  sector  people  who  are  on 
the  board? 

Mr.  Tucker.  The  corridor  is  comprised  of  the  local  communities; 
if  you  look  at  the  map,  communities  like  Compton  and  Lynwood. 

Chairman  Rangel.  Who  would  issue  the  bonds? 

Mr.  Tucker.  I  believe  that  the  corridor,  the  Transportation  Au- 
thority would  do  it. 

Chairman  Rangel.  How  much  has  been  invested  in  this  project 
approximately? 

Mr.  Tucker.  How  much  has  been  invested  already? 

Chairman  Rangel.  Already. 

Mr.  Tucker.  Let  me  find  out  how  many  hundreds  of  millions 
have  been  invested.  Over  $100  million  has  been  invested  already 
in  demonstration  projects  such  as  overpasses  and  underpasses. 

Chairman  Rangel.  Was  the  investment  made  with  the  hope  that 
tax-exempt  bonds  would  be  made  available? 

Mr.  Tucker.  The  investment  was  made  at  the  time  with  highway 
funds  and  they  anticipated,  I  believe,  that  they  would  have  enougn 
to  complete  the  project,  but  I  think  that  they  did  anticipate  at  the 
same  time  that  tax-exempt  bonds  would  have  to  come  in  to  assist 
at  some  point  in  time. 

Chairman  Rangel.  But  they  are  private  investment  funds  in  the 
project?  It  is  all  not  publicly  funded,  is  it? 

Mr.  Tucker.  Yes,  there  are  private  investment  funds  in  the 
project  by  way  of  the  railroad,  Southern  Pacific  and  others. 

Chairman  Rangel.  Why  did  they  choose  to  make  this  generic 
and  not  a  specific  exemption  for  this  particular  project? 

Mr.  Tucker.  I  believe,  Mr.  Chairman,  that  even  though  we  could 
maybe  lay  claim  to  the  fact  that  we  have  special  interests  here, 
that  we  believe  that  in  the  long  run  or  in  the  aggregate  picture, 
as  we  indicated  earlier,  there  may  be  other  port  facilities  that 
might  benefit  from  that  language  generically.  I  can  defer  as  to  that. 


1077 

Ms.  Harman.  I  wanted  to  add  that  we  understand  that  other 
ports  are  learning  from  this  whole  concept  of  a  transportation  cor- 
ridor and  we  would  think  it  unwise  for  the  committee  to  limit  this 
possibility  just  to  this  very  important  West  Coast  port.  If,  for  exam- 

f>le,  the  ports  of  New  York  and  New  Jersey  wanted  to  build  a  simi- 
ar  transportation  corridor  and  have  part  of  the  financing  come 
from  tax-exempt  bonds,  we  would  think  it  logical  given  the  need  in 
California  for  a  similar  facility  to  be  able  to  be  put  together  on  the 
East  Coast. 

Chairman  Rangel.  The  budget  people  have  an  illogical  way  in 
which  they  score  this.  This  would  be  considered  a  revenue  loss  even 
though  no  revenue  would  be  generated  if  the  bonds  didn't  issue;  so 
therefore  it  would  be  more  diflficult  to  determine  how  much  this 
would  cost  if  it  is  generic. 

Mr.  Horn.  Could  I  comment  that  this  is  a  natural  extension  of 
the  docks  and  wharves  provision,  as  I  am  sure  you  know,  and  we 
wouldn't  be  opposed  to  a  particular  designation  for  it,  but  I  think 
it  makes  sense  that  some  of  the  major  ports  in  the  United  States 
might  wish  to  access  such  authority  to  do  a  similar  thing,  combine 
transportation  corridors  so  you  would  get  more  rapid  service,  much 
more  efficient  lower  cost  domestically  across  all  your  States  than 
the  now  system  of  both  ship,  truck  to  connector  rail  lines. 

Chairman  Rangel.  Since  this  is  a  national,  or  indeed  has  inter- 
national implications,  how  far  up  in  the  administration  do  you  have 
support  for  this? 

Mr.  Tucker.  Well,  we  have  support  for  this,  Mr.  Chairman,  from 
the  Secretary  of  Transportation.  We  have  support  from  the  Sec- 
retary of  Commerce.  I  have  spoken  with  the  President  about  it.  So 
we  have  an  extreme  amount  of  support  for  it. 

Mr.  Horn.  I  might  add  on  that  point  that  when  Secretary  Pefia 
visited  there,  he  said  the  corridor  is  not  only  a  California  issue,  it 
is  a  national  priority. 

Chairman  Rangel.  I  would  think  that  is  a  bit  more  than  persua- 
sive. 

Does  any  member  seek  recognition? 

Mr.  Camp. 

Mr.  Camp.  Thank  you,  Mr.  Chairman. 

Ms.  Harman,  this  doesn't  change  the  bond  volume  cap,  does  it? 

Ms.  Harman.  It  doesn't  change  the  cap.  My  understanding  is 
that  as  defined  this  way,  this  would  not  be  part  of  that  cap.  This 
would  just  be  an  extension  to  an  existing  exemption  for  docks  and 
wharves  and  it  would  make  it  apply  to  tnis  logical  transportation, 
20-mile  transportation  corridor  that  comes  directly  off  the  dock. 

Mr.  Camp.  Has  Joint  Tax  issued  a  revenue  estimate  on  this 
project? 

Ms.  Harman.  That  is  the  one  we  have  been  talking  about,  the 
$115  million  figure.  As  we  have  been  discussing  with  the  chairman, 
it  is  for  all  the  projects,  not  just  the  Alameda  Corridor  Project.  We 
believe  our  portion  of  that  is  $35  million. 

As  the  chairman  discussed,  he  wants  to  know  what  the  rest  of 
it  is.  We  have  felt  that  making  this  a  generic  amendment  would 
be  more  logical  in  public  policy  terms.  As  Mr.  Horn  said,  we  would 
not  resist  the  committee  deciding  it  should  just  apply  to  this 
project,  but  we  think  it  makes  more  sense  to  apply  it  generically. 


1078 

Mr.  Camp.  Was  there  a  policy  reason  behind  saying  that  a  rail- 
road that  goes  to  a  port  is  not  functionally  related  to  the  port?  Was 
it  because  private  interests  were  involved  in  the  railroad?  I  am  con- 
fused as  to  why  the  ruling  came  down  the  way  it  did,  making  this 
legislation  necessary, 

Ms.  Harman.  I  would  assume  we  could  make  the  ruling  available 
to  the  committee.  There  is  no  specific — this  is  the  IRS  position,  and 
I  think  it  is  derived  from  a  kind  of  common  sense  concept  of  what 
a  port  is,  that  20-mile  extension  of  some  kind  of  a  transportation 
corridor  is  not  a  port.  We  think  it  is  in  terms  of  conceptually  under- 
standing what  is  the  purpose  of  the  port  as  an  entry  and  exit  point 
for  goods. 

Obviously,  the  consolidation  of  the  rail  and  other  systems  into 
this  port  will  make  this  an  efficient  port  and  able  to  compete  with 
Mexico.  Similarly  other  important  U.S.  ports  could  do  the  same 
thing,  those  that  are  impacted  by  traffic  and  noise,  et  cetera. 

We  feel  therefore  that  the  United  States  would  be  in  a  much  bet- 
ter position  in  terms  of  international  trade,  and  this  is  in  every- 
one's interest,  for  a  very,  very  modest  cost. 

Mr.  Camp.  Thank  you. 

Your  comments  have  been  very  helpful  and  I  look  forward  to 
working  with  you  on  this. 

Chairman  Rangel.  Mr.  Payne. 

Mr.  Payne.  I  think  that  what  you  are  proposing  has  important 
and  positive  public  policy  implications.  I  was  on  the  Public  Works 
Committee  last  year  as  we  wrote  the  Intermodal  Surface  Transpor- 
tation and  Efficiency  Act.  You  are  proposing  putting  into  practice 
what  we  were  attempting  to  look  at  in  that  bill  in  terms  of  a  blue- 
print for  the  Nation  of  intermodality  and  how  various  modes  of 
transportation  could  best  work  together  in  order  to  produce  the 
most  efficient  system  and  one  that  would  help  us  compete  with 
other  nations  aroimd  the  world. 

So  I  think  this  is  a  very  important  proposal  that  you  are  making 
and  one  that  deserves  very  serious  consideration. 

Thank  you. 

Chairman  Rangel.  Mr.  Kopetski. 

Mr.  Kopetski.  I  think  this  is  creative  financing.  My  question  has 
to  do  with  profits  and  whether  the  railroads  are  saying  that  this 
is  the  only  way  that  they  can  make  this  go  is  for  Government  to 
subsidize  this  corridor,  that  they  wouldn't  make  money  off  of  it  un- 
less Government  stepped  in  and  financed  this  capital  project. 

Mr.  Horn.  Could  I  comment?  This  is  not  about  profits  for  rail- 
roads. I  grew  up  in  the  Hiram  Johnson  tradition  of  being  against 
big  railroads  in  California.  This  is  about  congestion  in  the  south- 
land of  L.A.  County  and  Orange  County  and  clogging  up  the  free- 
ways and  not  being  able  to  readily  deliver  products  given  the  unbe- 
lievable expansion  that  is  going  to  take  place  in  the  next  three  dec- 
ades at  these  port  facilities. 

The  idea  is  to — ^that  won't  decrease  traffic  very  much.  We  would 
like  it  to  stay  where  it  is  because  trucks  will  still  need  the  regional 
southern  California  delivery.  But  if  you  are  going  to  move  produce 
through  that  port  by  containers  or  into  the  Midwest,  into  the 
Northwest,  into  the  South,  even  into  Mexico,  then  we  need  to  get 
moving  from  the  dock  side.  It  goes  straight  from  the  ship  into  the 


1079 

train  and  away  by  train.  It  solves  a  lot  of  pollution  and  a  lot  of  peo- 
ple problems  and  would  be  a  more  efficient  operation  simply  on 
congestion. 

Mr.  KoPETSKi.  So  the  railroads  are  not  going  to  make  any  money 
on  this? 

Mr.  Horn.  We  are  trying  to  buy  out  the  railroads.  The  ports  are 
doing  this.  The  two  ports  have  agreed  to  do  that.  There  are  now 
three  separate  lines  going  into  the  port,  Santa  Fe,  Union  Pacific, 
and  Southern  Pacific.  The  best  corridor  for  getting  the  traffic  into 
where  it  is  assembled  to  move  east  and  north  and  south  is  to  take 
this  Alameda  Corridor,  22  miles  long,  which  is  owned  by  Southern 
Pacific  Railroad.  The  ports  are  going  to  buy  them  out,  and  it  is  just 
a  matter  of  agreeing  on  the  price,  and  the  railroads  will  pay  a  fee 
to  use  this  corridor.  It  is  not  a  freebie  for  them.  It  brings  them 
dockside  in  the  port  of  Los  Angeles,  the  port  of  Long  Beach,  and 
all  three  will  be  using  this  one  corridor. 

Mr.  KOPETSKI.  Thank  you,  Mr.  Chairman. 

Chairman  Rangel.  It  certainly  sounds  like  an  exciting  project 
and  it  would  have  impact  on  our  trade  policy.  I  would  think  the 
administration  might  even  be  able  to  identify  similar  projects  that 
could  work  in  an  overall  national  trade  policy,  and  as  all  of  you 
know,  if  this  came  as  a  part  of  an  administration  package  to  us, 
they  would  be  able  to  find  it  much  easier  to  pay  for  it  since  we 
have  to  hurt  people,  industries,  and  other  projects  in  order  to  bring 
about  this  balance. 

In  any  event,  I  would  encourage  you  to  work  with  the  adminis- 
tration and  to  get  as  much  support  as  they  can  give  it  since  this 
committee  tries  not  only  to  write  good  tax  policy,  but  also  to  try 
to  avoid  conflict  with  the  administration  as  well  when  that  is  pos- 
sible. So  it  sounds  like  a  national  project  with  international  impli- 
cations, and  I  think  it  should  be  raised  to  that  level  since  it  has 
definitely  regional  support. 

I  thank  you  for  the  time  that  you  have  spent  with  us  today. 

Mr.  Tucker.  Thank  you  very  much,  Mr.  Chairman.  We  look  for- 
ward to  giving  you  and  your  subcommittee  more  information  and 
even  letters  of  support  from  the  administration  on  the  project. 
Thank  you,  again. 

Chairman  Rangel.  Thank  you. 

[The  information  follows:] 


STEPHEN  HORN 


1080 


€onqxtii  o!  tte  iHniteb  S^tatti 

J^ovat  of  iElepretfentatibeii 

nadijington.  SC  20515 

September  28,  1993 


The  Honorable  Charles  B.  Rangel 

Chainnan 

Select  Revenue  Measures  Subcommittee 

Committee  On  Ways  and  Means 

1105  Longworth 

Washington,  D.C.,     20515 

Dear  Mr.  Chairman: 

Thank  you  for  the  opportunity  to  testify  before  your  subcommittee  Wednesday, 
September  8. 

I  hope  we  were  able  to  effectively  communicate  the  importance  of  the  Alameda 
Corridor  not  only  to  the  Southern  California  region,  but  also  to  the  nation.   The  critical 
bottleneck  to  the  growth  of  the  Long  Beach  -  Los  Angeles  port  complex  is  land-side  access. 
If  cargo  cannot  move  efficiently  in  and  out  of  the  ports  through  the  tremendous  congestion 
of  the  Los  Angeles  region,  then  all  expansion  activities  will  be  for  naught.   The  answer  to 
this  problem  is  the  Alameda  Corridor. 

In  response  to  your  question  regarding  Administration  support  for  the  Corridor,  I 
have  attached  an  article  from  the  September  2,  1993  Journal  of  Commerce  entitled,  "Pena 
Pledges  Federal  Help  For  Alameda  Corridor. "    I  would  also  like  to  correct  a  figure  I  gave 
with  regard  to  the  amount  of  Customs  revenue  the  combined  Ports  generate.    I  was  mistaken 
when  I  stated  at  the  hearing  that  the  current  annual  revenue  is  approximately  $1  billion.   In 
fact,  current  combined  Customs  revenue  is  more  than  $3  billion  per  year.   With  the  2020 
expansion  plans,  Customs  receipts  are  expected  to  grow  to  $8  billion  per  year.    Clearly,  the 
federal  stake  in  this  investment  is  more  than  substantial.   Tax-exempt  bond  authority  would 
seem  a  small  down  payment  in  view  of  the  returns. 

Again,  thank  you  for  the  opportunity  to  appear  before  your  subcommittee.   If  I  may 
answer  any  ibrther  questions  you  have  on  the  Alameda  Corridor,  please  do  not  hesitate  to 


With  kindest  regards. 


Sincerely  yours, 


]u 


STEPHEN  HORN 
Member  of  Congress 


1081 


THE  JOURNAL  OF  COMMERCE  —  THURSDAY.  SEPTEMBER  2.  1993 


Pena  Pledges  Federal  Help 
For  Alam^a  Corridor 


By  KEVIN  a  HALL 

Jeonul  M  Canmicm  Su«t 

LOS  ANGELES  -  Touring 
Southern  CaUlomU  port*.  Tranapor- 
tatioo  Secretary  Kederico  Pena  hai 
pledged  the  federal  govenuneflc  will 
play  a  greater  role  in  th*  develop- 
menc  at  the  nation's  largest  iocer- 
modal  infrastructure  proJecL 

Mr.  Pena  toured  the  ports  of  Los 
Aogeles  and 
Long  Beach  this 
week  to  get  a 
belter  under- 
standing of  bow 
tntemaodal  imio- 
vatioas  have 
made  the  twin 
waierfroat  fnclH- 
ties  t&e  nation's 
largest  contaLn- 
erpoR  cocnpiex. 

The  secretary 
alao    flew    over  p^NA 

the  pro- .. ^ 

posed  Alameda  Corridor,  a  planned 
S1.8  Rulllon  consolidated  truck  and 
rail  corridor  from  the  ports  to  rail- 
yards  in  t&e  ea^t  part  of  sprawling 
Los  Angeles. 

The  corridor  b  being  planned  in 
an  effort  to  relieve  expected  mas- 
sive congestion  a.^sodaf/ai  with  th« 
predicted  doubling  of  cargo  moving 
through  the  bustling  ports  by  Uw 
year  2020.  ,.,,.,  ..-.o^.  ■■'.  i.'^  .-■• 
•  Project  backers  like  Geraldine 
Knatz.  planning  director  at  tj»  Port 
.of  Long.  Beach,  used  the  helicopter 
flight  and  visit  with  the  secretary  to 
sell  the  benefits  the  project  will 
yield  to  the  federal  govemtnenL  - 
'  Among  the  benefits,  she  said.  Is 
that  the  project  wtU  allow  for  In- 
creased freight  movements  worth 
billjoas  amiually  to  the  VS.  Customs 
Service..,  :.,.;  _;;  ...  ;  ^^... ;;:,;.■.  .\.. 

"They're  (Customs  receipts)  going 
to  grow  by  another  JS.2  bluioo,*  said 
Ms.  Rnata,  noting  receipts  are  ex- 
pected to  grow  from  $3  billion  amiu- ' 
ally  to  w  bilUon.  •.'.-;"■•:,?  ^■/r^'" 
The  growth  In  Customs  receipts 
will  eclipse  Che  $1.2  bllUon  funding 
shortfall  that  now  e^dsts  for  the 


project,  a  shortfall  that  represents! 
only  23%  of  the  expected  receipts.  ■ 
Although  the  plan  was  dealt  a 
major  setback  last  month  when  the 
Port  of  Los  Angeles  backed  out  oi 
its  share  of  a  $260  million  purchase 
of  trackage  needed  for  the  project, 
the  Idea  remains  viable  and  the  sec- 
retary said  he  came  to  g«  a  first- 
hand look  at  the  project. 

Two  of  Mr.  Pena's  predecessors 
«;ere  also  familiar  with  the  massive 
incermodal  project  but  did  little  to 
rally  federal  funding,  which  to  date 
remains  at  roughly  W  tnillioo  of  ' 
tlte  iHi  million  in  secured  commit<  ' 
mants. 

'  Saying  he  hoped  to  "to  be  the  ' 
last"  transportation  secretary  to  - 
deal  with  the  Intermodal  project. 
Mi-.  Pena  said  once  the  ports  have  ' 
concluded  their  track-purchase 
agreement  with  Southern  PacUlc  ', 
Lines,  the  federal  government  will  ■ 
step  up  its  role.  '. 

'We'll  have  a  definitive  state-  ' 
ment  about  the  need  from  the  feder- : 
al  government  in  terms  of  oor 
contribution,"  the  secretary  said  '. 
dudng  an  Interview  on  the  docio  of  ' 
American  Pre*ldent  Lines'  terminal  . 
in  Los  Angeles.  "Once  we  have  that 
(hen  we  go  to  work  and  begin  to 
decide  where  we  can  get  those  dol-  •" 
laxa  to  make  the  Alameda  Corridor 
a  reality.'      '  .. 

Added  Richard  Mlnti,  Mr.  Pena's  ,' 
spokesman.  "I  think  you're  going  to  ' 
see  additiooa!  federal  commitments  " 
down  the  road."  '  -~  ■-'^  •-,••.--?  ~'  -■:.;" 
-  Separately,'  Mr,  Pena  banded  " 
over  a  $49.6  million  check  to  expand 
the  city's  Metro  Red  Line  subway.  -: 
saying  the  project  will  help  rebuild  ; 
California's  struggling  economy.  :',';,' 
The  mone^  will  be  used  to  contin-  ' 
ue  construction  q{  the  WUshire  Cor-  ' 
ridor  segment,  which  follows'' 
Wilshire  Boulevard  from  the  West-." 
lake  area  to  Hollywood.  .'-'..  ^i  ''•.:'■■ 
■  The  J1.6  billion  subway,  already  ■ 
In  operation  downtown,  is  scheduled  • 
for  completion  In  IMS.  -..\s:j.-r, ."•.>„' 
•  -T;hi3  Is  the  largest  federal  In-  ^ 
vestment  in  any  transit  agency  In.* 
this  nation^'Mr.  Pena  said.   <.V.i;/n--'- 


1082 

Chairman  Rangel.  The  next  panel  consists  of  the  Association  of 
Christian  Schools  International,  John  Holmes,  director  of  govern- 
ment affairs;  the  PHH  Corp.  in  Maryland,  Samuel  Wright,  vice 
president  and  general  counsel;  the  Independent  Bakers  Association, 
Dale  Cox,  from  San  Raphael,  Calif,  accompanied  by  the  chairman 
of  the  Independents  Contractors  Committee,  Robert  Fanelli;  Fred 
Lazarus,  vice  president  of  the  Association  of  Independent  Colleges 
of  Art  and  Design,  from  Florida;  and  the  University  of  Florida 
Health  Science  Center,  Stanley  Rosenkranz,  general  counsel. 

Because  of  the  severe  limitations  on  time  that  we  have  and  the 
large  number  of  witnesses,  the  Chair  would  ask  that  the  witnesses 
restrict  their  oral  testimony  to  5  minutes  with  the  understanding, 
if  there  is  no  objection  from  the  committee,  that  your  full  written 
statements  will  be  entered  into  the  record. 

The  Chair,  hearing  no  objections,  will  proceed  with  Dr.  Holmes. 

STATEMENT  OF  JOHN  C.  HOLMES,  ED.D.,  DIRECTOR,  GOVERN- 
MENT AFFAIRS,  ASSOCIATION  OF  CHRISTIAN  SCHOOLS 
INTERNATIONAL 

Mr.  Holmes.  Good  morning,  Mr.  Chairman,  and  members  of  the 
committee.  Thank  you  for  this  opportunity  to  speak  concerning  rev- 
enue issue  No.  8,  which  would  restore  fair  treatment  of  lay-board 
religious  schools  under  the  Federal  Unemployment  Tax  Act. 

With  me  today  is  Dr.  Pauline  Washington,  who  is  an  adminis- 
trator and  founder  of  the  Washington-McLaughlin  Christian  School 
in  Takoma  Park,  Md.  She  is  right  over  the  Washington  line.  She 
is  right  behind  me.  Also  with  me  is  Rabbi  Abba  Cohen,  who  is  with 
Agudath  Israel  of  America,  and  also  Curran  Tiffany,  attorney  with 
the  National  Association  of  Evangelicals. 

ACSI  serves  over  3,000  schools.  ACSI  schools  follow  a  policy  of 
racial  nondiscrimination,  reaffirming  this  policy  annually.  I  come  to 
address  the  problem  of  unfair  treatment  and  inequity  within  the 
Tax  Code  concerning  about  15  percent  of  our  Christian  schools,  and 
all  of  the  Jewish  day  schools  represented  by  Agudath  Israel  of 
America.  About  20  percent  of  all  religious  schools  in  America  are 
not  owned  or  affiliated  directly  with  the  church.  The  schools  we 
seek  to  exempt  from  mandatory  participation  in  the  Federal  Unem- 
ployment Tax  Act  are  as  religious  as  church  or  synagogue-affiliated 
schools. 

Thev  are  denied  equal  treatment  without  anyone  even  suggesting 
that  they  are  not  religious,  but  they  are  under  the  governance  of 
boards  of  religious  laymen  rather  than  clergy.  Dr.  Washington, 
with  me  today,  is  an  administrator  of  such  a  school.  Because  of  this 
distinction  without  difference,  this  small  portion  of  religious  schools 
in  America  has  been  forced  to  participate  in  FUTA.  The  50  States 
could  mandate  participation  in  State  unemployment  laws,  but  the 
majority  of  the  States,  46,  I  believe,  choose  to  mirror  the  Federal 
statute  which  exempts  church-related  schools. 

Issue  8,  which  is  identical  to  Congressman  Crane's  H.R.  828, 
would  offer  the  same  choice  of  participation  in  FUTA  to  lay-board 
religious  schools  and  alleviate  the  inequity  faced  by  these  schools 
because  of  the  technicality  of  control.  For  religious  schools,  their 
faith  is  far  more  important  than  their  organizational  structure 
whether  or  not  they  are  affiliated  with  another  religious  body. 


1083 

Allow  me  to  give  a  personal  example  of  the  double  standard  now 
faced  by  religious  schools  not  owned  or  affiliated  with  a  church  or 
synagogue.  I  served  as  a  superintendent  of  four  Christian  schools 
in  Southern  California  in  the  same  area  that  they  were  talking 
about  this  morning.  The  schools  were  operated  by  a  church  in  Los 
Angeles  County.  The  school  board  discussed  how  the  secondary 
schools  could  serve  a  wider  constituency  of  evangelical  Christian 
community  if  the  junior  highs  and  the  high  schools  were  not 
viewed  by  the  parents  as  a  ministry  of  a  particular  church  because 
of  doctrinal  distinctions.  A  change  of  status  seemed  logical  to  the 
board  members  and  the  sponsoring  church  officials  shared  this  con- 
cern and  approved  the  legal  separation  of  the  two  secondary 
schools. 

A  board  of  laymen  was  formed  and  began  to  function  as  an  inde- 
pendent religious  educational  institution.  The  teachers  were  the 
same,  the  chapel  services  were  the  same,  the  curriculum  was  the 
same,  the  Bible  classes  were  the  same,  everything  except  the  rela- 
tionship with  the  church  remained  the  same,  but  the  schools,  con- 
sidered too  religious  to  be  eligible  for  participation  in  various  Fed- 
eral and  State  funding  sources,  were  no  longer  exempt  from  man- 
datory participation  in  FUTA.  This  was  a  triumph  of  form  over 
substance.  Issue  8  asks  no  more  or  less  than  what  church  schools 
now  have  by  virtue  of  section  3309(b)(1)  of  the  Internal  Revenue 
Code  of  1986,  which  relates  to  exemption.  When  the  exemption  sec- 
tion was  enacted.  Congress  exempted  employees  who  worked  in 
churches  and  religious  organizations  operated  by  churches.  Then  in 
1981  in  St.  Martin  Evangelical  Lutheran  Church  v.  the  State  of 
South  Dakota,  the  U.S.  Supreme  Court  ruled  that  the  exemption 
extended  to  elementary  and  secondary  schools  that  churches  oper- 
ate. 

Any  religious  school  that  receives  exemption  as  a  result  of  this 
measure  has  established  the  fact  with  the  Internal  Revenue  Service 
that  it  operates  primarily  for  religious  purposes  described  in  sec- 
tion 501(c)(3)  and  is  exempt  from  tax  under  the  501(a). 

We  believe  that  Congress  inadvertently  failed  to  exempt  lay- 
board  controlled  religious  schools  from  FUTA  because  these  schools 
are  not  numerous  and  Congress  was  simply  unaware  of  the  dif- 
ference and  the  technicalities  of  affiliation  from  other  religious 
schools. 

Back  in  1988  an  identical  amendment  to  Issue  No.  8  was  spon- 
sored by  Senator  Strom  Thurmond  and  it  was  unanimously  adopt- 
ed by  tne  Senate  during  consideration  of  the  tax  technical  correc- 
tions bill.  Unfortunately,  the  amendment  was  dropped  in  con- 
ference. This  amendment  was  viewed  by  the  Joint  Committee  on 
Taxation  as  revenue  neutral.  The  committee  said  that  the  net 
budget  effect  of  this  bill  would  actually  gain  the  Federal  Govern- 
ment less  than  $5  million  in  the  fiscal  year  and  negligible  effect 
each  year  thereafter.  Therefore  they  viewed  it  as  revenue  neutral. 
Thus  there  is  no  fiscal  burden  to  the  Government  to  provide  tax 
equity  and  simple  justice. 


1084 


We  urge  this  subcommittee  to  carefully  consider  this  remedial 
measure.  Its  passage  would  help  lay-board  religious  schools,  Catho- 
lic, Jewish,  and  Protestant,  which  are  helping  American  children 
succeed  morally,  spiritually,  and  academically.  Thank  you  for  lis- 
tening to  our  concerns. 

Chairman  Rangel.  Thank  you. 

[The  prepared  statement  follows:] 


1085 


Testimony  of 

Dr.  John  C.  Holmes,  Director  for  Government  Affairs 
Association  of  Christian  Schools  International 

Concerning 

MISCELLANEOUS  REVENUE  ISSUE  #8 

Before 

Subcommittee  on  Select  Revenue  Measures, 
Committee  on  Ways  and  Means, 
U.  S.  House  of  Representatives 

The  Honorable  Charles  B.  Rangel,  Chairman 
Septembers,  1993 


Mr.  Chairman  and  Members  of  the  Subcommittee  on 
Select  Revenue  Measures: 

Thank  you  for  this  opportunity  to  address  you  today 
conceming  Miscellaneous  Revenue  Issue  #8,  which  would 
restore  fair  treatment  of  lay-board  religious  schools  which  come 
under  the  Federal  Unemployment  Tax  Act.  My  name  is  Dr. 
John  Holmes  and  I  serve  here  in  Washington,  DC  as  the 
Association  of  Christian  Schools  Intemational's  Director  for 
Government  Affairs.  With  me  today  is  Dr.  Pauline  Washington 
who  is  the  administrator  and  founder  of  the  Washington- 
McLaughlin  Christian  School  in  Takoma  Park,  Maryland. 

The  Association  of  Christian  Schools  Intemational  is  the 
largest  association  of  evangelical  Christian  schools  in  the  nation 
with  over  three  thousand  schools  and  colleges.  We  now  serve 
nearly  570,000  students.  All  ACSI  schools  follow  a  policy  of 
racial  non-discrimination,  re-affirming  this  policy  on  an  annual 
basis  when  they  renew  their  membership.  I  come  here  today  to 
address  a  problem  of  unfair  treatment  and  inequity  within  the 
tax  code  concerning  about  three  out  of  every  twenty  of  our 
member  Christian  schools  and  nearly  all  of  the  Jewish  Day 
Schools  that  are  represented  by  Agudath  Israel  of  America. 

Approximately  one  out  of  every  five  religious  schools  in 
America  is  dqI  owned  or  affiliated  with  a  particular  church  or 
synagogue.  The  elementary  and  secondary  schools  we  seek  to 
exempt  from  mandatory  participation  in  the  Federal  Unemploy- 
ment Tax  Act  are  as  pervasively  religious  as  a  church  or  syna- 
gogue owned  or  affiliated  schools  would  be.  They  are  denied 


77-130  0-94 -3 


1086 


equal  treatment,  without  anyone  even  suggesting  that  they  are 
not  religious,  because  they  lack  formal  church  affiliation  and  are 
governed  by  boards  of  religious  laymen.  Dr.  Washington  is  the 
administrator  of  such  a  school. 

Because  of  this  distinction,  without  difference,  this  small 
portion  of  religious  schools  in  America  has  been  forced  to  par- 
ticipate in  FUTA.  On  their  own,  the  fifty  states  could  make  par- 
ticipation in  state  unemployment  laws  mandatory.  However,  an 
ovenwhelming  majority  of  states  choose  to  mirror  the  federal 
statute,  which  exempts  church  related  or  affiliated  elementary 
and  secondary  religious  schools.  Miscellaneous  Revenue 
Issue  #8,  which  I  understand  is  identical  to  Congressman  Phil 
Crane's  H.  R.  828,  would  offer  the  same  choice  of  participation 
in  FUTA  to  lay-board  religious  schools  and  alleviate  the  inequity 
faced  by  these  schools  because  of  the  technicality  of  control. 
For  religious  schools,  their  faith  is  far  more  important  than  their 
organizational  structure,  whether  or  not  they  are  affiliated  with 
another  religious  body. 

Allow  me  to  give  a  personal  example  of  the  double  stan- 
dard now  faced  by  religious  schools  which  are  not  owned  or 
affiliated  with  a  church  or  synagogue.  Before  coming  to  Wash- 
ington, DC,  I  served  as  a  superintendent  of  four  evangelical 
Christian  schools  in  southem  California.  All  of  the  schools  were 
operated  under  the  umbrella  of  a  church  in  Los  Angeles 
County.  Much  discussion  by  the  evangelical  school  board 
revolved  around  how  our  secondary  schools  could  more  ade- 
quately sen/e  a  wider  constituency  of  the  evangelical  Christian 
community  if  the  junior  and  senior  high  schools  were  not  viewed 
by  parents  as  a  ministry  of  a  particular  church,  because  of 
doctrinal  distinctives.  Since  the  secondary  schools  sought  to 
meet  the  needs  of  the  greater  evangelical  community  and  not 
stress  particular  doctrinal  distinctives,  a  change  of  status 
seemed  logical  to  a  majority  of  the  board  members  and  church 
officers. 

The  sponsoring  church  officials  shared  this  concern  and 
approved  the  legal  separation  of  the  secondary  schools.  A 
board  of  laymen  was  formed  and  began  to  function  as  an  inde- 
pendent religious  educational  institution.  The  teachers  were  the 
same,  the  chapel  services  were  the  same,  the  curriculum  was 
the  same,  the  Bible  classes  were  the  same-everything  except 
the  relationship  with  the  church  remained  the  same.  But  the 
schools,  which  were  considered  too  religious  to  be  eligible  for 
participation  in  various  federal  and  state  funding  sources,  were 
no  longer  exempt  from  mandatory  participation  in  federal 
unemployment  tax.  This  is  a  triumph  of  form  over  substance. 


1087 


Each  of  the  states  has  slightly  different  ways  of  handling 
unemployment  tax,  but  approximately  46  states  largely  mirror 
the  federal  code.  The  wording  proposed  in  Miscellaneous  Rev- 
enue Issue  #8  asks  no  more  or  less  than  what  private  religious 
schools  that  are  operated  or  affiliated  with  a  church  or  syna- 
gogue now  have  by  virtue  of  Section  3309  (b)(1)  of  the  Internal 
Revenue  Code  of  1986,  which  relates  to  exemption.  Back 
when  the  exemption  section  was  enacted.  Congress  exempted 
employees  who  worked  for  churches  and  religious  organiza- 
tions operated  by  churches.  Subsequently,  in  1981  in  St.  Martin 
Evangelical  Lutheran  Church  v.  South  Dakota,  the  U.  S. 
Supreme  Court  ruled  that  the  exemption  extended  to  elemen- 
tary and  secondary  schools  that  churches  operate. 

Any  religious  elementary  or  secondary  school  that  would 
receive  exemption  as  a  result  of  this  measure  would  have 
already  established  the  fact  with  the  Intemal  Revenue  Service 
that  it  "operated  primarily  for  religious  purposes,  which  is 
described  in  section  501(c)(3),  and  which  is  exempt  from  tax 
under  section  501  (a)." 

Lay-board  religious  schools  provide  excellent  education 
and  moral  training  for  American  young  people  with  a  caring 
environment  where  students  can  achieve  academically.  My 
own  doctoral  research  in  Los  Angeles  on  why  black,  Hispanic 
and  white  parents  chose  to  send  their  children  to  evangelical 
Christian  schools  attests  to  this  fact.  Parents  of  all  ethnic  back- 
grounds chose  to  re-enroll  their  children  because  of  the  caring 
environment  that  they  found  in  evangelical  Christian  schools. 

We  believe  that  Congress  failed  to  exempt  lay-board  con- 
trolled religious  schools  from  FUTA  because  these  schools  are 
not  numerous,  and  Congress  was  simply  unaware  of  the  differ- 
ence in  the  technicalities  of  affiliation  from  other  religious 
schools.  This  oversight  was  not  intentional  discrimination  on 
Congress'  part,  merely  inadvertent.  Back  in  1988,  an  identical 
amendment  to  Miscellaneous  Revenue  Issue  #8  was  spon- 
sored by  Senator  Strom  Thunnond.  The  amendment  was 
unanimously  adopted  by  the  Senate  during  consideration  of  the 
tax  technical  corrections  bill.  Unfortunately,  the  amendment 
was  dropped  in  conference.  We  do  not  know  why.  Amendment 
No.  3443  (in  the  100th  Congress)  was  viewed  by  the  Joint 
Committee  on  Taxation  as  revenue  neutral.  The  Joint  Commit- 
tee on  Taxation  said  the  "net  budget  effect  of  this  bill  would  be 
a  gain  of  less  than  $5  million  in  the  fiscal  year. .  .and  a  negligi- 
ble effect  each  year  thereafter."  (Congressional  Record,  100th 
Congress,  S14861-2)  Thus,  there  is  no  fiscal  burden  to  the 
government  to  provide  tax  equity  and  simple  justice. 


1088 


Groups  that  are  supportive  of  Miscellaneous  Revenue 
Issue  #8  include  Agudath  Israel  of  America,  the  American 
Association  of  Christian  Schools,  Coalitions  for  America,  Con- 
cemed  Women  for  America,  the  f^arian  [Catholic]  Secondary 
Schools  Association  and  the  National  Association  of  Evangeli- 
cals. We  urge  this  Sut>committee  to  carefully  consider  this 
remedial  measure.  Its  passage  would  help  lay-board  religious 
schools  which  are  helping  American  children  succeed  morally, 
spiritually  and  academically. 

Again,  thank  you  for  listening  to  our  concerns. 


1089 
Chairman  Rangel.  Mr.  Wright. 

STATEMENT  OF  SAMUEL  H.  WRIGHT,  VICE  PRESIDENT  AND 
GENERAL  COUNSEL;  PHH  CORP.,  HUNT  VALLEY,  MD. 

Mr.  Wright.  Thank  you,  Mr.  Chairman.  I  am  vice  president  and 
general  counsel  of  PHH  Corp.  I  am  testifying  on  behalf  of  PHH  and 
the  American  Automotive  Leasing  Association,  of  which  PHH  is  a 
member.  Our  company  leases  and  provides  management  services 
for  approximately  400,000  vehicles  throughout  North  America. 

AALA  members  lease  and  manage  the  majority  of  sales  and  serv- 
ice vehicles  used  by  businesses  throughout  our  country,  a  market 
that  exceeds  3V2  million  vehicles.  We  strongly  support  the  proposal 
to  modify  the  computation  of  depreciation  under  the  alternative 
minimum  tax  by  increasing  the  acceleration  method  from  150  per- 
cent of  declining  balance  to  200  percent.  This  proposal  would  go  a 
long  way  toward  redressing  unfair  treatment  accorded  to  these  as- 
sets under  our  tax  system. 

Passenger  cars  and  trucks  are  allowed  inadequate  depreciation 
deductions  under  both  alternative  and  regular  income  tax.  These 
assets  receive  worse  depreciation  treatment  than  other  business  as- 
sets. This  discrimination  artificially  increases  the  actual  cost  of 
these  business  assets,  distorting  business  investment  decisions,  re- 
ducing the  number  of  passenger  vehicles  purchased.  Prior  to  1986 
automobiles  were  depreciated  over  3  years  using  a  200  percent  de- 
clining balance  method.  This  provided  a  modest  amount  of  incen- 
tive depreciation,  consistent  with  the  regular  tax  depreciation. 

Unfortunately,  in  1986  Congress  lengthened  the  writeoff  period 
to  5  years.  This  change  removed  all  tax  incentive  for  passenger 
cars  and  light  trucks  from  regular  tax  depreciation.  The  1986  legis- 
lation also  included  a  corporate  alternative  minimum  tax.  Under 
the  AMT,  depreciation  deductions  were  intended  to  approximate 
economic  depreciation  in  the  value  of  business  assets.  For  business- 
use  passenger  vehicles,  this  period  was  set  at  the  same  5-year  pe- 
riod provided  under  the  regular  tax,  but  using  a  150  percent  declin- 
ing balance  method. 

In  1989  Congress  directed  the  Treasury  Department  to  conduct 
a  study  of  the  proper  class  life  of  cars  and  light  trucks.  In  1981  the 
Treasury  Department  issued  a  report,  which  recommended  a  class 
life  of  3.5  years  for  business-use  cars  generally.  They  also  con- 
cluded that  the  actual  useful  life  of  cars  in  business  fleets,  the  type 
of  vehicles  I  am  talking  about  today,  is  2.8  years.  The  1991  report 
is  just  the  latest  in  a  long  line  of  Treasury  determinations  going 
back  over  50  years,  concluding  that  cars  should  be  depreciated  over 
a  3-year  period.  Shortening  the  regular  tax  recovery  period  for  pas- 
senger vehicles  to  3  years  to  reflect  the  Treasury  Department's  re- 
port would  simply  reinstate  an  incentive  comparable  to  that  ac- 
corded other  business  assets. 

As  I  mentioned  earlier,  the  Treasury  Department's  1991  study 
concludes  that  the  appropriate  class  life  for  business-use  cars 
should  be  3.5  years,  2.8  years  for  fleet  cars.  Thus,  in  order  to  re- 
flect real  world  depreciation,  the  cost  recovery  period  under  AMT 
for  cars  should  be  no  more  than  3.5  years.  The  economic  effect  of 
the  proposal  to  increase  the  acceleration  method  for  business-use 
passenger  vehicles  from  150  to  200  percent  is  equivalent  to  short- 


1090 

ening  the  AMT  recovery  period  from  5  to  4  years.  Increasing  the 
acceleration  method  from  150  to  200  percent  would  therefore  mere- 
ly allow  us  to  deduct  amounts  which  reflect  the  actual  decline  in 
the  value  of  our  business  assets,  nothing  more. 

I  should  mention  that  the  recent  repeal  of  the  ACE  a(Jjustment 
for  depreciation  under  AMT  was  a  substantial  simplification.  How- 
ever, repealing  ACE  did  not  provide  business-use  vehicles  with  eco- 
nomic depreciation  and  did  not  remove  the  discrimination  against 
these  assets  as  compared  with  other  business  assets. 

In  closing,  I  would  like  to  emphasize  the  importance  of  this 
change  to  the  entire  economy.  More  than  95  percent  of  business- 
use  cars  are  products  of  domestic  manufacturers.  Over  125,000 
businesses  have  fleets  of  10  or  more  automobiles.  Business-use  cars 
also  account  for  over  one-third  of  all  automobiles  sold  by  domestic 
manufacturers,  over  3.5  million  cars  annually.  Merely  providing 
these  vehicles  with  depreciation  rules,  which  reflect  economic  re- 
ality, will  increase  sales  and  result  in  more  economic  growth  and 
more  jobs  not  only  in  the  automobile  manufacturing  industry,  but 
also  in  industries  such  as  steel,  glass,  rubber,  textiles,  and  semi- 
conductors that  supply  the  automobile  manufacturers.  Thank  you, 
Mr.  Chairman,  and  the  committee  for  your  attention. 

Chairman  Rangel.  Thank  you,  Mr.  Wright. 

[The  prepared  statement  follows:] 


1091 


Statement  of 
Samuel  H.  Wright 
American  Automotive  Leasing 

Before 

The  Subcommittee  on  Select  Revenue  Measures 

Committee  on  Ways  and  Means 

United  States  House  of  Representatives 

September  8,  1993 

Mr.  Chairman: 

My  name  is  Samuel  H.  Wright.  I  am  the  vice  president  and  general  counsel  of 
PHH  Corporation  which  is  located  in  Hunt  Valley,  Maryland.  I  am  testifying  on  behalf  of  PHH 
Corporation  and  the  American  Automotive  Leasing  Association  of  which  PHH  is  a  member. 

PHH  Corporation  is  a  $4  billion  company  whose  stock  is  traded  on  the  New  York 
Stock  Exchange.  Through  its  subsidiary,  PHH  FleetAmerica,  PHH  Corporation  leases  and 
provides  management  services  for  approximately  400,000  vehicles  throughout  North  America. 
AALA  is  composed  of  companies  who  lease  and  manage  the  majority  of  sales  and  service 
vehicles  used  by  businesses  throughout  our  country,  a  market  exceeding  three  and  a  half  million 
vehicles. 

We  want  to  thank  you  for  giving  us  the  opportunity  to  present  our  views  of  the 
proposal  to  modify  the  computation  of  depreciation  under  the  alternative  minimum  tax  by 
increasing  the  acceleration  method  from  the  150  percent  declining  balance  method  applicable 
under  present  law  to  a  200  percent  declining  balance  method.  This  proposal  would  go  a  long 
way  toward  redressing  unfair  treatment  accorded  to  these  assets  under  our  tax  system. 

The  problem  we  have  under  present  law  is  simply  that  passenger  cars  and  light 
trucks  are  allowed  inadequate  depreciation  deductions  under  both  the  alternative  minimum  tax 
and  the  regular  income  tax.  These  assets  receive  worse  depreciation  treatment  than  other 
business  assets.  This  discrimination  artificially  increases  the  actual  cost  of  these  business  assets, 
distorting  business  investment  decisions  and  reducing  the  number  of  passenger  vehicles 
purchased. 

I  am  sure  that  it  is  difficult  to  understand  how  such  an  important  part  of  our 
economy  such  as  the  automobile  industry  and  passenger  vehicles  used  in  business  has  come  to 
be  treated  so  unfairly  by  our  tax  system.  It  may  be  helpful  if  I  summarized  some  historical 
background  on  this  issue. 


Background 

Automobiles  have  traditionally  been  depreciated  over  three  years  using  a  200 
percent  declining  balance  method  under  the  regular  tax.  This  provided  a  modest  amount  of 
incentive  depreciation  consistent  with  the  intent  of  regular  tax  depreciation.  Unfortunately,  in 
1986,  Congress  lengthened  the  write-off  period  to  five  years,  evidently  based  on  a 
misapprehension  of  the  useful  life  of  these  vehicles.  This  removed  all  incentive  from  regular  tax 
depreciation. 

The  1986  Tax  Reform  Act  also  included  a  corporate  alternative  minimum  tax. 
Under  the  AMT,  depreciation  deductions  were  intended  to  approximate  economic  depreciation 
in  the  value  of  business  assets,  rather  than  to  provide  any  incentive  similar  to  that  intended  to 
be  provided  for  regular  tax  depreciation.  As  a  result,  most  assets  were  to  be  depreciated  over 
a  somewhat  longer  period  using  a  ISO  percent  declining  balance  method.  For  business-use 
passenger  vehicles,  this  period  was  set  at  the  same  five-year  period  provided  under  the  regular 
tax,  reflecting  that  the  regular  tax  cost  recovery  period  was  longer  than  i4>pn^riate. 


1092 


Treasury  Department  Study 


Since  1986,  it  has  been  made  absolutely  clear  that  business-use  passenger  vehicles 
receive  inadequate  cost  recovery  treatment. 

The  Omnibus  Budget  Reconciliation  Act  of  1989  directed  the  Treasury  Department 
to  conduct  a  study  of  the  proper  class  life  of  cars  and  light  trucks.  The  Treasury  Department 
issued  a  report  in  April,  1991,  which  recommended  a  class  life  of  3.S  years  for  business-use 
cars,  and,  in  fact,  concluded  that  the  actual  adjusted  economic  life  for  cars  used  in  business  fleets 
is  2.8  years. 

The  1991  Treasury  Dqjartment  rqx>rt  is  just  the  latest  in  a  long  line  of  Treasury 
determinations  that  cars  should  be  depreciated  over  a  3-year  period.  The  earliest  determination 
was  made  in  Bulletin  F,  an  I.R.S.  list  of  guideline  lives  for  depreciable  assets  promulgated  in 
1942.  In  1962,  the  Treasury  Department  issued  new  depreciation  guidelines  in  Revenue 
Procedure  62-21  and  once  again  provided  for  a  3-year  class  life  for  automobiles.  Finally,  in 
1971 ,  the  Treasury  Department  issued  new  "asset  depreciation  range"  ("ADR")  guidelines  which 
were  based  on  the  1962  guidelines,  but  allowed  taxpayers  to  select  a  class  life  within  a  20 
percent  range  around  the  mid-point  life.   Cars  were  assigned  a  mid-point  class  life  of  3  years. 

Absent  legislation  to  the  contrary,  an  asset  with  a  3.S  year  class  life  would  be 
treated  as  three-year  property  for  tax  purposes.  However,  the  1986  Act  specified  that  passenger 
cars  placed  in  service  after  December  31,  1986,  and  before  January  1,  1992,  were  to  be 
classified  as  five-year  property.  After  that  period,  the  Treasury  Department  was  given  the 
authority  to  reclassify  cars  and  light  trucks  as  i^ropriate. 


Congressional  Intent 

It  is  important  to  highlight  this  point.  When  the  cost  recovery  period  for  cars  was 
lengthened  to  five  years.  Congress  intended  that  the  five-year  write-off  period  was  to  be  required 
only  through  1991,  presumably  to  balance  revenues  to  the  Treasury  over  that  period.  After 
1991,  the  Treasury  Department  was  given  authority  to  reclassify  cars  as  three-year  property  if 
it  deemed  the  shorter  period  to  be  appropriate  based  on  economic  useful  life  of  the  asset. 

Unfortunately,  in  1988,  Congress  enacted  legislation  that  removed  the  Treasury 
Department's  authority  to  reclassify  assets  as  appropriate.  While  that  change  was  intended  to 
keep  Treasury  from  lengthening  cost  recovery  periods  for  certain  assets  without  clear 
Congressional  direction,  it  had  the  effect  of  locking  cars  into  an  inappropriately  long  recovery 
period. 

Shortening  the  cost  recovery  period  for  passenger  vehicles  would  not  be  an 
incentive  of  some  arbitrary  amount,  but  would,  rather,  simply  provide  these  assets  with  a  cost 
recovery  period  that  accurately  reflects  their  usefulness  in  business.  Nevertheless,  shortening  the 
cost  recovery  period  to  three  years  for  business-use  cars  would  also  be  one  of  the  most  effective 
and  targeted  tax  incentives  that  the  GovCTnment  could  provide. 


AMT  Pgprggiation 

The  1991  Treasury  Dqurtment  report  also  makes  absolutely  clear  that  a  five-year 
cost  recovery  period  using  the  150  percent  declining  balance  method  provides  less  than  economic 
depreciation.  Nevertheless,  under  present  law,  taxpayers  are  forced  to  use  this  five-year  period 
for  automobiles  used  in  their  business.  This  is  absolutely  contrary  to  the  intent  of  the  AMT  to 
tax  no  more  than  economic  income.  Simple  fairness  would  require  that  AMT  depreciation  be 
improved  to  reflect  economic  depreciation. 


1093 


As  I  mentioned  earlier,  the  Treasury  Department's  1991  study  concludes  that  an 
appropriate  class  life  for  business-use  cars  would  be  3.5  years.  Thus,  the  cost  recovery  period 
for  cars  under  the  AMT  should  be  no  more  than  3.5  years  to  reflect  economic  depreciation,  not 
the  5-year  period  provided  under  present  law. 

The  economic  effect  of  increasing  the  acceleration  method  for  business-use 
passenger  vehicles  from  150  percent  to  200  percent  declining  balance  is  equivalent  to  shortening 
the  AMT  cost  recovery  period  for  these  assets  from  5  years  to  4  years.  This  would  provide  tax 
depreciation  no  greater  than  an  approximation  of  the  economic  depreciation  in  the  value  of  the 
assets. 

I  would  like  to  thank  the  members  of  this  committee  for  their  efforts  in  repealing 
the  ACE  adjustment  for  depreciation  under  the  AMT.  That  change  was  a  substantial 
simplification.  However,  it  is  not  an  alternative  to  changing  the  acceleration  method  to  200 
percent  of  the  declining  balance.  Repealing  the  ACE  adjustment  did  not  provide  business-use 
vehicles  with  economic  depreciation  and  did  not  remove  the  discrimination  against  these  assets 
as  compared  with  other  business  assets. 

We  hope  that,  when  you  review  requests  for  depreciation  relief  under  the  AMT, 
you  will  ask  whether  relief  requested  would  provide  simply  economic  depreciation  or  whether 
the  requested  relief  would  provide  incentive  depreciation.  All  we  are  asking  is  that  we  be 
allowed  to  deduct  amounts  which  reflect  the  actual  decline  in  the  value  of  business  assets. 
Increasing  the  acceleration  method  from  150  percent  to  200  percent  would  accomplish  this. 


Economic  Impact 

In  closing,  I  would  like  to  emphasize  the  importance  of  this  change  to  our 
country's  economic  well-being.  More  than  95  percent  of  business-use  cars  are  products  of 
domestic  manufacturers.  Over  125,000  businesses  have  fleets  of  ten  or  more  automobiles. 
Business-use  cars  also  account  for  over  one-third  of  all  automobiles  sold  by  domestic 
manufacturers  -  over  3.5  million  cars  per  year. 

Improving  tax  depreciation  deductions  directly  reduces  the  cost  of  a  vehicle.  It 
is  generally  agreed  in  the  industry  that  a  reduction  in  price  will  result  in  an  increase  in  sales  of 
an  equal  percentage.  In  the  business  context,  the  increase  in  sales  will  occur  both  because 
businesses  will  operate  more  automobiles  and  because  they  will  replace  their  fleets  more  often. 


Thus,  merely  providing  these  vehicles  with  the  depreciation  rules  which  reflect 
economic  reality  will  increase  sales  and  result  in  more  economic  growth  and  more  jobs,  not  only 
in  automobile  manufacturing  directly,  but  also  in  industries  such  as  steel,  glass,  rubber,  textiles, 
and  semiconductors  that  supply  the  automobile  manufacturers. 

For  this  reason  we  strongly  urge  that  you  adopt  the  proposal  to  provide  for  the  use 
of  200  percent  declining  balance  depreciation  for  passenger  vehicles  for  alternative  minimum  tax 
purposes.  We  believe  that  the  cost  recovery  period  for  these  assets  under  the  regular  tax  should 
also  be  reduced  from  five  to  three  years,  reflecting  the  results  of  the  1991  Treasury  Department 
study.  However,  if  revenue  constraints  require  deferral  of  this  proposal,  you  can  be  certain  that 
the  proposed  change  in  AMT  depreciation  will  have  a  real  and  important  impact. 


1094 

Chairman  Rangel,  Independent  Bakers,  Dale  Cox. 

STATEMENT  OF  DALE  COX,  INDEPENDENT  CONTRACTOR,  SAN 
RAPHAEL,  CALIF.,  ON  BEHALF  OF  THE  INDEPENDENT 
BAKERS  ASSOCIATION;  ACCOMPANIED  BY  ROBERT  FANELLI, 
CHAIRMAN,  INDEPENDENT  CONTRACTORS  COMMITTEE 

Mr.  Cox.  Thank  you,  Mr.  Chairman.  I  am  here  today  in  support 
of  the  proposal  bv  the  baking  industry  for  relief  from  the  statutory 
employee  rule.  The  statutory  employee  rule  could  place  special  and 
troublesome  burdens  on  distributors  of  bakery  products  that  essen- 
tially are  not  imposed  on  any  other  industry  in  America. 

A  recerif  change  of  interpretation  of  the  statutory  employee  rule 
by  the  IRS  threatens  to  destroy  an  opportunity  that  was  available 
to  me. 

I  would  like  to  tell  you  a  little  bit  about  myself  and  what  the  op- 
portunity to  be  an  independent  businessman  has  meant  to  me. 

I  was  bom  and  raised  in  California.  I  don't  have  a  college  degree, 
and  with  only  a  high  school  diploma  spent  the  first  decade  of  my 
adult  life  working  as  an  employee  in  a  job  which  offered  little  fu- 
ture beyond  a  weekly  paycheck.  In  1968,  at  the  age  of  31,  I  was 
fortunate  enough  to  come  across  the  opportunity  to  purchase  a 
Pepperidge  Farm  Cookie  territory  in  northern  California  for  $5,000. 

I  was  married  and  in  those  days  $5,000  was  an  enormous 
amount  of  money.  Even  so,  my  young  wife  and  I  were  determined 
to  build  a  better  life  for  our  children  and  so,  frightened  to  death, 
we  bought  the  territory. 

I  thrived  as  a  bakery  distributor  entrepreneur.  For  the  first  time 
in  my  life  I  was  excited  about  my  work,  and  while  I  routinely  had 
to  work  60  or  more  hours  a  week,  those  were  happy  times.  The 
business  was  small  and  my  resources  smaller.  My  garage  was  my 
warehouse  and  at  busy  times  of  the  year  cartons  of  cookie  inven- 
tory could  be  found  in  every  nook  and  cranny  of  our  home,  where 
the  kids  quickly  discoverea  that  they  could  be  stacked  to  make 
great  play  forts.  Needless  to  say,  all  of  the  kids  in  the  neighborhood 
wanted  to  play  at  our  house. 

The  years  of  hard  work  and  sacrifice  paid  off  and  my  business 
grew  and  grew.  Today  I  have  19  employees  and  my  $5,000  original 
investment  is  worth  well  in  excess  of  $1  million.  It  is  a  wonderful 
thing  to  have  that  kind  of  financial  security,  but  the  greatest  joy 
for  my  wife  and  me  has  come  from  what  it  has  enabled  us  to  do 
for  our  family. 

Our  son,  Kussell,  now  33,  is  active  with  me  in  the  business  and 
we  work  closely  together  on  a  daily  basis.  That  is  a  joy  every  father 
should  get  to  experience.  Our  daughter,  Suzanne,  who  is  28,  has 
graduated  from  Oregon  State  University  and  Dominican  College 
with  a  teaching  degree  and  is  happily  married  to  a  good  and  able 
husband.  We  have  four  grandchildren  so  far  and  look  forward  to 
watching  them  grow  and  to  being  able  to  help  them  if  they  are  ever 
in  need. 

It  is  doubtful  that  I  could  ever  have  had  all  these  blessings  un- 
less that  bakery  distributorship  had  come  into  my  life.  The  ability 
to  act  as  my  own  boss,  to  market  my  products  as  I  saw  fit,  and  to 
have  a  financial  reward  for  my  hard  work  was  a  tremendous  incen- 
tive. That  incentive  would  have  been  lost  if  I  were  an  employee. 


1095 

which  is  the  Hkely  result  of  applying  the  statutory  employee  rule 
in  the  manner  recently  put  forth  by  the  IRS.  In  terms  of  my  suc- 
cess, that  would  have  been  tragic. 

I  understand  that  the  matter  of  tax  compliance  generally  is  an 
ongoing  concern  of  Congress.  I  appreciate  that  concern.  I  can  tell 
you  that  in  my  years  as  a  bakery  distributor  I  have  been  careful 
to  discharge  my  responsibilities  as  a  taxpayer  under  the  law.  I 
want  to  assure  the  members  of  this  subcommittee  that  if  this  pro- 
posal is  adopted,  I  and  the  baking  industry  stand  ready  to  assist 
the  subcommittee  to  ensure  compliance  with  the  law. 

I  have  attached  to  this  written  statement  a  copv  of  the  statement 
submitted  on  behalf  of  the  Independent  Bakers  Association.  I  com- 
pletely endorse  the  IBA  statement  and  ask  that  it  be  included  in 
the  record  as  part  of  my  statement. 

Thank  you  for  the  opportunity  to  appear  here  today  and  present 
these  remarks. 

[The  prepared  statement  and  attachment  follow:] 


1096 

STATEMENT  ON  BEHALF  OF  THE 

INDEPENDENT  BAKERS  ASSOCIATION  AND  THE  BAKERY  INDUSTRY 

IN  SUPPORT  OF  THE  PROPOSAL  TO  CLARIFY  THE  EMPLOYMENT 

TAX  STATUS  OF  DISTRIBUTORS  OF  BAKERY  PRODUCTS 


Hearings  on  Miscellaneous  Revenue  Issues 

Subcoimnittee  on  Select  Revenue  Measures 

House  Ways  and  Means  Committee 

September  8,  1993 

Chairman  Rangel  and  Members  of  the  Subcommittee: 

The  Independent  Bakers  Association  appreciates  the 
opportunity  to  present  its  views  and  the  views  of  the  bakery 
industry  on  the  proposal  by  Congressman  Sundquist  to  amend  IRC 
§  3121(d) (3) (A)  relating  to  the  employment  tax  status  of  bakery 
distributors.   We  would  like  to  thank  Mr.  Sundquist  for  his 
strong  support  for  this  proposal. 

Description  of  the  Issue 

The  issue  before  the  Subcommittee  is  whether  bakery 
distributors  should  be  classified  by  statute  as  employees  for 
employment  tax  purposes  even  though  they  may  be  treated  as 
independent  contractors  for  income  tax  purposes.   Our  proposal 
(which  is  attached  to  this  statement  as  Exhibit  1)  would  delete 
the  phrase  "bakery  products,"  from  section  3121(d)(3)(A)  of  the 
Code.   Section  3121(d)(3)(A)  presently  provides  that  certain 
distributors,  including  bakery  distributors,  will  under  certain 
circumstances  be  treated  as  employees  for  employment  tax 
purposes. - 

We  believe  it  is  important  to  clarify  for  the 
Subcommittee  what  this  proposal  will  and  will  not  do.   The 
proposal  under  consideration  today  does  not  seek  to  classify 


-'section  3121(d)(3)(A)  provides: 

(d)  EMPLOYEE. — For  purposes  of  this  chapter,  the  term 
"employee"  means — 

(1)  ...;  or 

(2)  ...;  or 

(3)  any  individual  (other  than  an  individual  who  is  an 
employee  under  paragraph  (1)  or  (2))  who  performs  services 
for  remuneration  for  any  person — 

(A)  as  an  agent-driver  or  commission-driver  engaged 
in  distributing  meat  products,  vegetable  products, 
bakery  products,  beverages  (other  than  milk) ,  or 
laundry  or  dry-cleaning  services,  for  his  principal; 

(B)  . 

(C)  . 

(D)  . 

if  the  contract  of  service  contemplates  that  substantially 
all  of  such  services  are  to  be  performed  personally  by  such 
individual;  except  that  an  individual  shall  not  be  included 
in  the  term  "employee"  under  the  provisions  of  this 
paragraph  if  such  individual  has  a  substantial  investment  in 
facilities  used  in  connection  with  the  performance  of  such 
services  (other  than  in  facilities  for  transportation) ,  or 
if  the  services  are  in  the  nature  of  a  single  transaction 
not  part  of  a  continuing  relationship  with  the  person  for 
whom  the  services  are  performed;  or 

(4)  .... 


1097 


bakery  distributors  as  independent  contractors.-   Neither  does 
it  seek  to  change  in  any  way  the  common  law  test  by  which 
individuals  are  classified  as  either  employees  or  independent 
contractors.   The  proposal  would  simply  eliminate  the 
irrebuttable  presumption  that  bakery  distributors  are  employees 
for  employment  tax  purposes  and  would  place  them  on  the  same 
footing  with  other  individuals  by  making  distributors  subject  to 
the  same  common  law  test  for  employment  status  as  everyone  else. 

Section  3121(d) (3) (A)  overrides  the  normal,  common  law 
test  for  employment  status;  thus,  even  though  a  bakery 
distributor  would  be  treated  as  an  independent  contractor  for 
income  tax  purposes,  if  that  person  falls  under  section 
3121(d)(3)(A),  he  or  she  will  nevertheless  be  considered  an 
employee  for  employment  tax  purpose.-   We  contend  that  this 
treatment  as  statutory  employees  is  completely  inappropriate  in 
light  of  the  way  in  which  the  bakery  industry  is  organized. 
Classifying  bakery  distributors  as  statutory  employees  is 
disruptive  of  sound  business  arrangements,  is  technically 
unworkable,  and  serves  no  identifiable  tax  or  retirement  policy 
goal.   Current  law  discriminates  against  distributors  by  creating 
an  irrebuttable  presumption  that  they  are  employees  for 
employment  tax  purposes  even  though  they  may  be  independent 
contractors  for  income  tax  purposes. 

History  of  the  Statutory  Emplovee  Provision 

Section  3121(d) (3) (A)  was  enacted  in  1950,  at  a  time 
when  the  combined  FICA  tax  rate  for  employees  was  higher  than  the 
tax  on  self-employed  individuals.-   Section  3121(d)(3)(A)  was 
enacted  as  remedial  legislation.   Congress  concluded  that  "the 
usual  common-law  rules  for  determining  the  employer-employee 
relationship  [fell]  short  of  covering  certain  individuals  who 
should  be  taxed  at  the  employee  rate  under  the  old-age, 
survivors,  and  disability  insurance  program."-'   Congress 
apparently  concluded  that  it  was  important  to  secure  for 
distributors  the  higher  Social  Security  benefits  that  would 
accrue  to  them  as  a  result  of  the  higher  tax  rates. 

While  originally  drafted  to  apply  to  house-to-house 
sales  persons,  the  language  eventually  enacted  referred  to 
individuals  distributing  certain  goods  and  services,  such  as 
bakery,  meat,  vegetable  and  beverage  products,  and  laundry  and 
dry  cleaning  services.-   The  statute  excepted  from  its  coverage 
individuals  who  had  a  substantial  investment  in  facilities  used 


-The  announcement  for  today's  hearing  described  the  proposal  as 
one  to  "eliminate  the  rule  treating  distributors  of  bakery 
products  as  statutory  employees  for  purposes  of  Social  Security 
payroll  taxation  and  coverage,  and  to  treat  such  persons  as 
independent  contractors."   This  is  technically  not  correct. 
While  the  proposal  does  eliminate  the  rule  classifying  bakery 
distributors  as  statutory  employees,  it  does  not  classify  them  as 
independent  contractors.   It  merely  leaves  these  individuals 
subject  to  the  normal,  common  law  test  for  employment  status. 

-'section  3121(d)(3)(A)  classifies  certain  driver-distributors  as 
employees  for  employment  tax  purposes.   It  was  made  applicable  to 
the  unemployment  tax  in  1972.   See  IRC  §  3306(i).   It  has  no 
application  or  effect  on  their  classification  for  income  tax 
purposes. 

-'in  1950,  the  combined  FICA  tax  rate  for  employees  was  4%  while 
the  tax  on  self-employed  individuals  was  2.25%.   The  "combined" 
FICA  tax  rate  for  employees  is  the  sum  of  the  equal  taxes  paid  by 
employers  and  employees  on  wages  paid  to  the  employee. 

-'see  Senate  Report  1669,  81st  Cong.,  2d  Sess.  144  (1950). 

-  Indeed,  the  legislative  history  of  the  statute  is  replete  with 
references  to  house-to-house  sales. 


1098 


in  connection  with  the  performance  of  such  services  (other  than 
in  facilities  for  transportation) .- 

It  is  apparent  that  the  world  has  changed  dramatically 
from  the  time  the  statute  was  enacted  in  1950.   Door-to-door 
deliveries  of  bread,  milk  and  cakes  have  long  since  gone  the  way 
of  the  dinosaur.-   Today,  local  bakeries  have  disappeared, 
having  been  consolidated  into  regional  and  national  concerns. 
Bakery  products  are  no  longer  sold  door-to-door.   Instead,  these 
products  are  often  distributed  by  individuals  owning  their  own 
territories,  who  purchase  their  products  directly  from  the 
bakeries,  and  who  distribute  the  products  to  commercial  customers 
(such  as  grocery  stores  and  restaurants)  for  resale. 

More  important  still  is  the  change  in  the  respective 
tax  rates  for  employees  and  self-employed  individuals.   As 
previously  discussed,  the  combined  FICA  tax  rate  for  employees  in 
1950  was  4  percent  while  the  tax  rate  on  self-employed 
individuals  was  2.25  percent.   In  1984,  these  tax  rates  were 
equalized.-   Today,  both  the  self-employed  tax  rate  and  the 
combined  FICA  tax  rate  stand  at  15.3  percent.   Therefore,  the 
primary  reason  for  the  enactment  of  the  statutory  employee  rule 
—  the  higher  tax  rate  for  employees  and  the  higher  benefits 
derived  from  that  higher  tax  rate  —  no  longer  exists.   Section 
3121(d) (3) (A)  is  an  anachronism  in  today's  world. 

Why  Is  The  statutory  Emplovee  Issue  Important  Today? 

Some  members  of  the  Subcommittee  may  wonder  why  this 
issue  is  so  critical  in  1993  when  the  statute  has  been  in  effect 
since  1950.   The  answer  is  simple.   For  many  years  the  bakery 
industry  considered  section  3121(d)(3)(A)  inapplicable  to  most 
distributors.   It  was  not  until  1991,  when  the  Internal  Revenue 
Service  issued  GCM  39853,  that  the  industry's  long-held  view  was 
called  into  question. 

As  previously  discussed,  the  statute  provides  an 
exception  where  the  individual  has  a  "substantial  investment  in 
facilities."  Throughout  the  years,  many  bakery  distributors  have 
purchased  their  territories  from  the  bakeries  or  from  the 
previous  owners  of  the  territories.   The  distributor's  ownership 
of  the  territory  has  been  consistently  interpreted  as  a 
substantial  investment  in  facilities,  thus  exempting  the 
distributor  from  the  statutory  employee  provision.— 

This  interpretation  of  the  substantial  facilities 
exception  was  never,  to  anyone's  knowledge,  challenged  by  the 
Internal  Revenue  Service  on  audit.   Indeed,  in  1985,  the  Internal 


-  The  statute  also  provides  an  additional  exception  in  cases 
where  the  contract  contemplates  that  substantially  all  of  such 
services  shall  be  performed  personally  by  such  individual. 

-Throughout  the  1940s  and  1950s,  bakeries  were  essentially  local 
operations.   Bread  and  layer  cakes  were  baked  daily  and  delivered 
to  the  homes  of  customers.   These  products  were  typically  sold  by 
individuals  who  used  delivery  vehicles  to  cover  certain 
neighborhoods  or  routes.   The  vehicles  used  may  or  may  not  have 
been  owned  by  the  individuals.   Similarly,  meat  and  vegetable 
products  were  sold  off  of  vehicles  making  house-to-house 
deliveries.   Milk  was  also  delivered  house-to-house,  although 
dairy  products  were  excepted  from  the  final  version  of  the  bill 
without  explanation.   Finally,  laundry  services  were  typically 
provided  on  a  house-to-house  basis. 

-'see  Social  Security  Amendments  of  1983,  P.L.  98-21,  section 
123. 

^It  Should  be  noted  that  many  distributors  have  substantial 
investments  in  equipment  in  addition  to  their  investment  in  their 
territories. 


1099 


Revenue  Service  concluded  in  a  technical  advice  memorandum  that 
investment  ^n  a  territory  constituted  a  substantial  investment  in 
facilities.—   It  was  not  until  that  technical  advice 
memorandum  was  withdrawn  in  1988  and  the  IRS,  in  1991,  released 
General  Counsel  Memorandum  39853  that  the  issue  became  one  of 
concern  to  the  bakery  industry. 

GCM  39853  takes  the  position  that  the  term  "facilities" 
in  section  3121(d)(3)(A)  does  not  include  distribution  rights, 
such  as  a  territory.   Ironically,  the  Internal  Revenue  Service 
has  never  sought  to  enforce  the  position  taken  in  the  GCM  by 
means  of  an  audit  or  through  litigation.   The  GCM  stands  as  the 
sole  pronouncement  of  the  IRS  position  on  this  issue. 

There  is  serious  doubt  that  the  GCM  is  correct.   Its 
reasoning  is  questionable,  its  logic  weak  and  its  timing  (41 
years  after  the  statute  was  passed)  is  suspect.—   It  is  the 
undisputed  opinion  of  tax  advisors  to  the  bakery  industry  that 
the  position  taken  in  the  GCM  would  not  prevail  in  court  if  the 
issue  were  litigated.   Nevertheless,  the  uncertainty  that  the  GCM 
has  created  among  members  of  the  industry  makes  legislative 
action  to  clarify  the  issue  imperative. 

Effect  on  the  Bakery  Industry 

1.    Technical  Problems 

Application  of  the  statutory  employee  rules  to  bakery 
distributors  would  create  numerous  technical  difficulties. 
First,  the  distributor  would  be  required  to  compute  his  or  her 
income  two  different  ways  —  once  as  an  employee  and  once  as  a 
self-employed  individual  —  since  certain  expenses  are  deductible 
for  self-employed  individuals  but  not  for  employees.   The 
absurdity  of  requiring  two  sets  of  books  for  the  same  person, 
especially  a  small  business  person,  is  self-evident. 

Second,  if  the  bakery  is  required  to  treat  the 
distributor  as  an  employee,  what  amount  does  the  bakery  report  to 
the  distributor  and  to  the  IRS  as  wages  paid?   Bakeries  sell 
their  products  to  distributors.   The  distributor  then  resells  the 
product  to  the  market  or  other  establishment.   The  distributors 
income  is  the  profit  made  from  this  resale.   The  bakery  has  no 
information  about  the  profit  the  distributor  has  made.   If  the 
bakery  were  to  report  the  price  paid  by  the  distributor  for  the 
product,  that  would  grossly  overstate  the  amount  of  income 
actually  earned  by  the  distributor.   It  would  totally  fail  to 
take  into  account  the  purchase  cost  of  the  products  and  any  of 
the  distributor's  expenses  (such  as  fuel,  marketing  costs,  wages 
paid  to  the  distributor's  employees,  etc.),  as  well  as  any 
discounts  or  allowances  given  to  the  distributor's  customers 
directly  by  the  distributor. 

The  distributor  system,  as  it  has  evolved  through  the 
years,  bears  no  resemblance  whatsoever  to  a  wage-based 
compensation  system.   The  industry  would  be  forced  to  completely 
restructure  itself  in  order  to  comply  in  any  meaningful  way  with 
the  statutory  employee  rule.   The  costs  of  this  restructuring 
would  be  wholly  disproportionate  to  the  benefit  (if  any)  derived. 

Finally,  classification  of  distributors  as  statutory 
employees  is  particularly  confusing  in  light  of  the  fact  that 


'see  TAM  8607001. 


—  For  example,  the  GCM  argues  that  distribution  rights  (such  as  a 
delivery  territory)  are  more  akin  to  education,  training  and 
experience  because  all  are  intangible.   Unlike  education, 
training  and  experience,  however,  distribution  rights  are  assets 
that  are  readily  transferable  and  that  have  a  value  in  the  market 
place  that  is  affected  by  the  skill  and  industry  of  the 
distributor. 


1100 


many  distributors  have  their  own  employees  and  operate  in 
corporate  form.   In  particular,  distributors  with  large,  heavily 
populated  or  prosperous  territories  may  have  several  employees  of 
their  own. 

Many  questions  arise  as  to  how  the  employees  of  the 
distributor  are  to  be  treated.   A  few  of  those  questions  include: 
(1)  Will  they  be  considered  employees  of  the  distributor  or  the 
bakery?   (2)  If  the  latter,  how  will  that  affect  their  treatment 
by  the  bakery  for  income  tax  purposes.   (3)  Are  these  employees 
of  the  distributor  eligible  for  benefit  plans  maintained  by  the 
bakery?   (4)  If  they  are  not  treated  as  employees  of  the  bakery, 
are  their  wages  deductible  for  purposes  of  computing  the  FICA  tax 
on  the  distributor's  income. 

This  last  question  points  out  the  strange  consequences 
of  applying  the  statutory  employee  rule  to  bakery  distributors. 
If  the  distributor  is  treated  as  an  independent  contractor,  wages 
paid  to  the  distributor's  employees  are  deductible  in  computing 
the  distributor's  self -employment  tax.   However,  these  wages  are 
not  be  deductible  by  the  distributor  if  he  or  she  is  treated  as 
an  employee.   The  result  is  that  the  wages  paid  to  the 
distributor's  employees  is  subject  to  double  FICA  tax:  once  by 
the  bakery  and  the  distributor  (because  these  wages  are  not 
deductible  in  computing  the  distributor's  wages)  and  once  by  the 
distributor  and  his  or  her  employee,   without  question,  this  is 
the  wrong  outcome.   Yet  it  would  be  required  if  the  statutory 
employee  rule  applies. 

The  result  is  even  more  egregious  under  the  recently- 
passed  Omnibus  Budget  Reconciliation  Act  of  1993.   Before  passage 
of  the  Act,  there  was  a  cap  on  the  wages  or  self -employment 
income  subject  to  FICA  or  self-employment  tax.—   Section  13207 
of  the  Act  repealed  the  cap  on  amounts  subject  to  the  hospital 
insurance  portion  of  the  employment  tax  (now  equal  to  2.9 
percent)  beginning  in  1994.   Thus,  where  the  damage  done  by  the 
statutory  employee  rule  was  once  mitigated  by  the  wage  cap,  that 
cap  as  now  been  removed,  at  least  for  purposes  of  the  HI  tax. 

It  is  not  difficult  to  see  that  application  of  the 
statutory  employee  rule  to  bakery  distributors  creates  bizarre 
results.   Without  any  policy  rationale  remaining  to  support  its 
existence,  this  potential  for  bizarre  results  is  a  compelling 
reason  to  eliminate  the  rule. 

2.    Effect  on  Entrepreneurship 

The  eventual  outcome  of  applying  the  statutory  employee 
rule  to  the  bakery  industry  is  likely  to  be  a  complete 
restructuring  of  the  industry.   A  part  of  that  restructuring  will 
no  doubt  be  a  severe  cutback  on  the  use  of  independent  bakery 
distributors.   Such  a  result  would  be  truly  unfortunate  in  view 
of  the  benefits  that  the  industry  (both  the  bakeries  and  the 
distributors  themselves)  has  gained  from  their  use. 

Application  of  the  statutory  employee  rule  would  deny 
an  entrepreneurial  opportunity  to  those  individuals  desiring  to 
operate  a  wholesale  distributorship  business.   Independent 
wholesalers  have  significant  opportunities  to  develop  a 
successful  distributorship  and  earn  profits  substantially  greater 
than  the  salaries  that  would  be  paid  to  employees.   In  addition, 
if  the  distributor  owns  his  or  her  distribution  rights,  the 
distributor  has  the  opportunity  to  build  the  value  of  the 
distributorship  that  he  or  she  may  eventually  sell  for  a  greater 
profit.   All  these  incentives  are  lost,  however,  if  the 
distributor  cannot  be  an  independent  wholesaler. 

Moreover,  application  of  the  statutory  employee  rule  to 
existing  ownership  arrangements  would  substantially  undermine  the 


and  135,000  for  the  HI  portion  of  the  tax. 


For  1993,  the  caps  were  57,600  for  the  OASDI  portion  of  the  tax 


1101 


value  of  the  distributorships  already  in  place.   The  value  of 
these  existing  arrangements  was  premised  on  an  assumption  of 
independent  contractor  status.   Application  of  the  statutory 
employee  rule  would  severely  lower  those  values  to  the  detriment 
of  the  distributors  owning  distribution  rights. 

Conqjusion 

It  is  understandable  that  Congress  would  seek  to 
prevent  abuses  in  the  employment  tax  system  that  can  occur  from 
classification  of  an  individual  as  an  independent  contractor 
rather  than  an  employee.   However,  the  bakery  distributor  system 
is  not  riddled  with  those  abuses.   Even  if  the  system  were, 
however,  application  of  the  statutory  employee  rule  is  clearly 
the  wrong  answer  to  the  problem.   Indeed,  its  application  would 
create  far  more  problems  than  it  would  solve.   For  all  the 
reasons  stated  above,  we  urge  the  Subcommittee  to  endorse  the 
proposal  of  the  Independent  Bakers  Association  to  repeal  the  rule 
with  respect  to  bakery  distributors. 

Thank  you  very  much,  Mr.  Chairman. 


1102 


EXHIBIT    1 

SEC.  XXX.  CLARIFICATION  OF  SELF-EMPLOYMENT  STATUS  OF  CERTAIN 
BAKERY  DISTRIBUTORS. 

(a)  In  General.— Subparagraph  (A)  of  section  3121(d)(3) 
(relating  to  the  definition  of  employee  for  employment  tax 
purposes)  is  amended  by  stri)cing  "bakery  products,". 

(b)  Effective  Date.— The  amendment  made  by  this  section  shall 
take  effect  on  the  date  of  enactment  of  this  Act. 


1103 

Chairman  Rangel.  Thank  you. 

Next  is  Fred  Lazarus,  the  Association  of  Independent  Colleges  of 
Art  and  Design. 

STATEMENT  OF  FRED  LAZARUS  IV,  VICE  PRESIDENT,  ASSO- 
CIATION OF  INDEPENDENT  COLLEGES  OF  ART  AND  DESIGN 

Mr.  Lazarus.  Mr.  Chairman,  members  of  the  committee,  thank 
you  for  allowing  me  to  testify  today.  I  am  here  representing  the  As- 
sociation of  Independent  Colleg:es  of  Art  and  Design.  These  30  col- 
leges are  major  sources  of  designers  throughout  this  country  and 
employ  thousands  of  designers  and  artists  on  their  faculties.  They 
include  institutions  that  range  on  the  West  Coast  from  the  Arts 
Center  in  Pasadena  to  Parsons  School  of  Design  and  the  School  of 
Visual  Arts  in  New  York  City.  All  of  these  are  leaders  in  their  field 
producing  the  leading  industrial  designers  in  the  automobile  indus- 
try, fashion  designers,  and  graphic  designers.  There  are  dozens  of 
these  institutions  throughout  this  country. 

We  are  here  today  asking  your  committee  to  correct  what  we  be- 
lieve was  an  oversight  of  the  1986  Tax  Reform  Act.  That  bill  under 
section  170(e)(4)  provided  companies  who  contributed  equipment  to 
colleges  and  universities  a  greater  level  of  deductibility  for  gifts 
made  for  the  purposes  of  the  physical  and  biological  sciences.  This 
section  encouraged  many  gifts,  enhanced  research  at  these  colleges 
and  universities,  and  is  helping  this  Nation  enhance  its  competi- 
tiveness through  the  work  being  done  by  these  colleges  and  univer- 
sities. 

The  section  does  not  allow  the  same  level  of  deductibility  for  con- 
tributions of  equipment  used  in  the  fields  of  design.  It  is  particu- 
larly discriminatory  to  colleges  that  do  not  have  physical  or  biologi- 
cal sciences.  Colleges  such  as  ours,  which  do  not  nave  these  depart- 
ments, are  excluded  firom  these  gifts  and  are  not  able  to  receive  the 
benefits  that  our  colleagues  in  other  colleges  and  universities  have. 
However,  the  contribution  that  these  colleges  are  making  to  the 
fields  of  design  and  to  the  competitiveness  of  this  country  are  more 
substantial  than  all  these  other  institutions.  The  financial  impact 
of  this  modification  in  the  bill  would  be  negligible,  and  the  impact 
would  be  very  significant.  It  would  enhance  research  and  develop- 
ment in  the  field  of  design,  and  we  hope  we  would  have  your  sup- 
port for  this  change  in  section  170(e)(4)  of  the  bill.  Thank  you  very 
much. 

Chairman  Rangel.  Thank  you. 

[The  prepared  statement  follows:! 


1104 


TESTIMONY  FOR  THE  MODIFICATION  OF  THE 
INTERNAL  REVENOE  CODE  OP  1986 


September  8,  1993 


Submitted  by  Fred  Lazarus,  President,  Maryland  Institute, 
College  of  Art,  on  behalf  of  the  Association  of  Independent 
Colleges  of  Art  and  Design 


Mr.  Chairman  and  Members  of  the  Committee.  Thank  you  for 
inviting  the  Association  of  Independent  Colleges  of  Art  and  Design 
to  testify  before  you  today. 

The  Association  of  Independent  Colleges  of  Art  and  Design  is 
an  organization  representing  virtually  every  art  and  design  college 
in  the  country.  These  colleges  employ  thousands  of  artists  and 
designers  and  include  among  their  alumni  the  finest  artists  and 
designers  in  this  country. 

We  come  before  you  to  request  your  help  in  correcting  an 
oversight  in  the  1986  Internal  Revenue  Code  which  we  believe,  if 
changed,  will  help  enhance  the  competitiveness  of  American 
industry. 

The  1986  Internal  Revenue  Code,  under  Section  170(e)(4), 
provides  for  a  greater  level  of  deductibility  for  contributions  of 
scientific  property  used  in  research  activities  by  educational 
institutions.  However,  for  the  gift  to  qualify,  the  property 
donated  must  be  scientific  equipment  used  for  research  or 
experimentation  or  for  research  training  in  the  physical  or 
biological  sciences. 

This  provision  in  the  tax  code  has  resulted  in  millions  of 
dollars  worth  of  critical  equipment  being  donated  to  colleges  and 
universities  which  offer  degrees  in  the  physical  or  biological 
sciences  and  do  research  in  these  fields.  The  rationale  for  this 
tax  provision  has  been  that  this  research  has  a  direct  impact  on 
the  United  State's  economic  competitiveness.  The  Ways  and  Means 
Committee  Report  stated,  as  part  of  its  rationale,  that  studies 
indicate  that  in  equipment-intensive  research  areas,  such  as 
physics,  chemistry,  and  electrical  engineering,  the  continuing 
growth  of  university  expenditures  has  not  kept  pace  with  the  rising 
costs  of  scientific  instrumentation.  The  budget  impact  of  this 
change  was  estimated  to  be  $5  million. 

The  same  rationale  that  caused  the  Congress  to  recognize  the 
importance  of  providing  a  greater  level  of  deductibility  for 
contributions  of  equipment  for  the  biological  and  physical  sciences 
can  and  should  be  applied  to  design  and  design  theory.  America's 
competitiveness  not  only  depends  upon  scientific  research  but  also 
on  the  quality  of  design  of  our  products.  The  design  process  15  to 
20  years  ago  required  a  minimum  of  equipment.  Today,  that  has 
changed.  Design  today  has  become  an  equipment-intensive  area  of 
research  and  study. 

The  design  colleges  and  university  design  departments  are  the 
country's  major  source  of  talent  and  know-how  in  the  automotive 
and  product  design  fields,  and  fashion  and  in  film.  However,  there 
is  a  growing  list  of  other  product  areas  that  draw  upon  the  design 
work  of  these  colleges  and  universities.  These  fields  include: 
computer  graphics;  computer  animation;  image  processing;  scientific 
and  aga^^al  visualization;  object,  product,  process  simulation  and 
dimensional  modeling;  image  modification  and  storage;  interactive 
digital  television;  typography  and  letter  design  and  image  and 
photo  screening. 


1105 


Most  of  these  applications  are  parts  of  the  film,  print  and 
graphics,  and  electronic  imagery  industries.  These  are  huge 
industries  where  our  competitiveness  is  being  threatened.  However, 
even  more  important  to  our  economy  is  the  impact  these  industries 
and  processes  have  on  other  product  areas  and  manufacturing. 

colleges  and  universities,  particularly  the  specialized 
colleges  of  art  and  design  yhich  produce  most  of  our  leading 
designers,  do  not  have  the  resources  to  provide  their  faculty  and 
students  with  the  equipment  that  is  now  available.  Much  of  the 
research  that  is  needed  to  determine  how  to  use  and  apply  this 
equipment  to  the  needs  of  the  design  fields  is  not  being  developed 
because  of  the  lack  of  monetary  resources  in  the  colleges  and 
universities. 

The  current  language  In  the  tax  code  precludes  equipment 
manufacturers  from  contributing  equipment  to  colleges  where  the 
intent  of  the  donee  is  to  use  the  equipment  to  advance  design 
theory  or  develop  new  concepts  and  uses  of  design.  This  impediment 
has  reduced  the  rate  of  progress  in  design  research  at  the  college 
and  university  level  and  caused  design  training  to  lag  behind. 

This  is  a  request  made  on  behalf  of  the  members  of  the 
Association  of  Independent  Colleges  of  Art  and  Design  to  modify  the 
current  IRS  code  to  include  Design  and  Design  Theory  within  the 
definition  of  allowable  research,  experimentation,  and  research 
training  in  Section  170(e)(4). 


1106 

Chairman  Rangel.  Mr.  Rosenkranz,  counsel,  University  of  Flor- 
ida Health  Center. 

STATEMENT  OF  STANLEY  W.  ROSENKRANZ,  GENERAL  COUN- 
SEL, FLORroA  CLINICAL  PRACTICE  ASSOCIATION,  INC.;  AND 
SPECIAL  COUNSEL,  UNIVERSITY  OF  FLORIDA  AGENCY,  AND 
UNIVERSITY  OF  SOUTH  FLORIDA  COLLEGE  OF  MEDICINE'S 
FACULTY  PRACTICE  PLAN 

Mr.  Rosenkranz.  Good  morning,  Mr.  Chairman,  and  members  of 
the  subcommittee.  Our  law  firm  is  general  counsel  to  the  Florida 
Clinical  Practice  Association,  a  section  501(c)(3)  Florida  not-for- 
profit  corporation,  and  special  counsel  both  to  the  University  of 
South  Florida  College  of  Medicine  practice  plan  and  the  University 
of  Florida  agency  funds. 

The  Florida  Clinical  Practice  Association  I  will  refer  to  as  the 
FCPA  and  the  agency  funds  as  the  University  Fund.  I  appear  today 
on  behalf  of  our  clients  to  support  the  enactment  of  a  proposed 
amendment  to  section  125(a)  of  Public  Law  98-21,  which  I  will 
refer  to  as  section  125. 

While  our  firm  does  not  represent  the  board  of  regents  of  the 
State  of  Florida,  I  have  been  authorized  to  say  the  proposed 
amendment  has  the  full  and  enthusiastic  support  of  the  board's 
chancellor.  Section  3121(s)  of  the  code  speaks  to  FICA  responsibil- 
ity when  two  or  more  related  corporations  concurrently  employ  the 
same  individual.  Section  125  under  certain  circumstances  treats  as 
related  corporations  for  purposes  of  section  3121(s)  a  State  univer- 
sity, which  employs  health  professionals  at  a  medical  school,  and 
a  faculty  practice  plan,  which  employs  faculty  members  of  such 
medical  school. 

Section  125,  however,  requires  employment  by  the  practice  plan. 
To  do  so  in  Florida,  which  has  broadly  retained  the  doctrine  of  sov- 
ereign immunity,  would  expose  faculty  members  at  the  Health 
Science  Center  and  the  respective  practice  plans  to  severe  liabilitv 
for  medical  malpractice  claims.  For  multiple  reasons,  some  of  whicn 
will  be  discussed  later,  including  accommodating  the  instant  situa- 
tion, moneys  are  transferred  to  tne  University  Fund.  From  the  Uni- 
versity Fund  from  time  to  time,  a  check  is  drawn  in  part  payment 
of  the  compensation  agreed  to  in  the  sole  contract  of  employment. 

As  currently  required  by  the  Internal  Revenue  Service  and  cur- 
rently the  subject  of  controversy  between  the  college  and  the  Inter- 
nal Revenue  Service,  the  University  Fund  pays  FICA  as  if  it  were 
the  sole  employer.  The  result,  a  single  contract  of  employment,  two 
checks  in  payment  of  the  compensation  required  by  the  single  con- 
tract of  employment,  double  employer  share  of  FICA  with  no  auto- 
matic refund  mechanism,  double  employee  share  of  FICA  with  an 
automatic  refund  provision,  two  form  W-2s  and  two  form  941s. 

Our  written  statement  cites  both  letter  and  published  rulings  in- 
dicating that  the  existence  of  two  taxpaying  entities  having  two 
taxpayer  identification  numbers  and  each  filing  separate  W-9s  and 
Form  941s  is  not  unknown  to  the  Internal  Revenue  Service. 

In  short,  the  Internal  Revenue  Service  is  familiar  with  dual 
payer  situations  such  as  that  for  which  we  contend.  Moreover,  in 
the  world  of  computers  it  should  be  a  situation  of  no  moment.  The 
proposed  legislation  will  merely  allow  the  intended  result  provided 


1107 

by  section  125  a  provision  not  practically  available  to  the  various 
health  professional  colleges  at  the  University  of  Florida  Health 
Science  Center  or  the  University  of  South  Florida.  The  proposed 
amendment  postulates  a  position  that  is  supported  by  an  American 
Association  of  Medical  College  letter  that  will  be  submitted  for  the 
record. 

It  is  also  supported,  Mr.  Chairman,  by  a  letter  to  you  signed  by 
all  members  of  the  Florida  Delegation,  Democrat  and  Republican. 
Based  on  our  informal  survey  of  other  medical  schools  in  this  situa- 
tion, it  would  appear  that  the  revenue  impact  should  be  limited  to 
the  employer's  share  of  FICA  that  would  otherwise  be  paid  by  the 
agency  funds  at  the  University  of  Florida  and  the  University  of 
South  Florida.  Thus,  we  estimate  that  the  impact  would  not  exceed 
$3  million  a  year.  These  dollars  would,  of  course,  otherwise  be 
available  to  support  academic  and  research  activities  and  the  provi- 
sion of  health  care  services  to  both  categorically  and  medically  indi- 
gent patients. 

The  essence  of  the  matter  before  this  subcommittee  is  the  pay- 
ment of  double  FICA  by  respective  agency  accounts  at  the  univer- 
sities in  Florida.  The  situation  is  caused  by,  one,  the  inability  of 
the  agency  funds  to  utilize  section  125  because  neither  is  a  practice 
plan  and  an  employer  and,  two,  the  inability  of  our  clients  to  con- 
vince the  Comptroller  of  the  State  of  Florida,  a  constitutional  offi- 
cer of  the  State  of  Florida,  to  agree  to  effect  payment  of  faculty 
compensation  in  a  manner  that  would  obviate  the  need  for  legisla- 
tion. 

At  a  meeting  with  a  member  of  the  staff  of  the  House  Ways  and 
Means  Committee's  Subcommittee  on  Social  Security,  amplification 
of  this  point  was  requested.  As  we  attempted  to  prevent  the  double 
FICA  situation,  an  obvious  solution  suggested  itself.  In  lieu  of  mul- 
tiple payments  due  under  a  faculty  member's  single  contract  of  em- 
ployment, such  payment  would  be  effected  solely  through  the  Office 
of  Comptroller  of  the  State  of  Florida. 

In  an  attempt  to  effect  such  an  arrangement,  negotiations  over 
a  protracted  period  of  time  were  carried  on  with  top  officials  of  the 
Comptroller's  office.  In  addition  to  members  of  the  staff  of  one  of 
the  universities,  as  well  as  assorted  legal  counsel,  the  meetings 
were  attended  by  either  the  chancellor  of  the  Florida  system  or  one 
of  the  vice  chancellors.  Three  major  concerns  evolved. 

One,  when  would  the  money  become  State  funds  if  transferred  to 
the  Comptroller  and  what  would  be  the  legal  ramifications  if  the 
funds  were  deemed  to  be  State  funds.  The  thought  was  that  a 
marked  actuarial  adjustment  under  the  Florida  retirement  system 
would  be  required.  Having  then  just  recently  suffered  the  economic 
consequences  of  such  a  readjustment,  $6  to  $7  million,  the  Univer- 
sity of  Florida  College  of  Medicine  was  less  than  enthusiastic  con- 
cerning such  a  possibility. 

The  second  problem  was  nonacademic  intrusion  into  the  aca- 
demic decisionmaking  process.  This  question  is  particularly  perti- 
nent in  the  State  of  Florida,  a  State  where  the  university  system 
has  been  historically  subject  to  the  micromanagement  proclivities 
of  both  the  legislative  and  executive  branches  of  the  State  govern- 
ment. 


1108 

At  the  University  of  Florida,  practice  plans  contribute  52  percent 
of  the  College  of  Medicine's  budget,  and  at  the  University  of  South 
Florida  55  percent  of  the  College  of  Medicine's  budget.  Given  such 
facts,  the  chancellor,  along  with  the  academic  leadership,  felt  it 
most  important  to  ensure  academic  control  and  oversight  by  man- 
dating that  these  funds  be  retained  in  a  university  agency  account, 
thereby  assuring  continued  university  oversight. 

The  final  problem  was  loss  of  flexibility  in  connection  with  fixing 
the  compensation  of  the  clinical  faculty.  At  a  time  when  the  health 
care  system  is  imdergoing  tremendous  change,  particularly  as  re- 
gards physician  compensation,  the  prospect  of  such  loss  of  flexibil- 
ity was  of  grave  concern.  It  was  felt  that  the  health  care  delivery 
system  environment  mandated  afforded  each  college  of  medicine 
flexibility  as  to  the  compensation  to  be  paid  to  members  of  the  clin- 
ical faculty  staff",  neither  party  being  able  to  assuage  the  other's 
concerns  at  the  termination  of  the  negotiations.  The  chancellor  con- 
cluded that  it  was  not  possible  to  fi'ame  a  solution  that  adequately 
addressed  the  concerns  of  each  of  the  involved  parties. 

Thank  you,  Mr.  Chairman, 

[The  prepared  statement  follows:] 


1109 


WRITTEN  STATSIENT  OF  STANLEY  M.  ROSENKRANZ  OF 
SHEAR,  NEWMAN,  HAHN  ft  ROSENKRANZ,  P. A., 
GENERAL  COUNSEL  TO  FLORIDA  CLINICAL  PRACTICE 
ASSOCIATION,  INC.,  A  FLORIDA  NOT  FOR  PROFIT 
a}RPORATI(»«  AND  SPECIAL  COUNSEL  TO  THE 
UNIVERSITY  OF  FLORIDA  AGENCY  FUNDS  AND  THE 
UNIVERSITY  OF  SOUTH  FLORIDA  COLLEGE  OF 
MEDICINE'S  FACULTY  PRACTICE  PLAN  SUBMITTED  IN 
SUPPORT  OF  A  PROPOSED  AMENDMENT  TO  SECTION 
12S(a)  OF  P.L.  98-21  (THE  "PROPOSED 
LEGISLATION") 

PRQPQgED  LEGISLATIOr^ 

Section  3121 (s)  of  the  Internal  Revenue  Code  of  1986,  as 
amended  (the  "Code")  speaks  to  "FICA  responsibility"  when  two  or 
more  related  corporations  concurrently  employ  the  same  individual 
compensated  through  a  common  paymaster  which  is  one  of  such 
corporations.   Section  125(a)  of  Public  Law  98-21  (the  "Special 
Act"),  under  certain  circumstances,  treats  as  related 
corporations  for  purposes  of  that  Code  section,  a  state 
university  which  employs  health  professionals  at  a  medical  school 
and  a  faculty  practice  plan  which  employs  faculty  members  of  such 
medical  school. 

The  Proposed  Legislation  would  amend  the  Special  Act  as 
follows : 

"Sec.     125(a)    of  P.L.    98-21,    TREATMENT  OF  CERTAIN 
FACULTY  PRACTICE  PLANS  OR   UNIVERSITY  ACCOUNTS. 

"(a)      General  Rule   —  For  purposes  of  subsection    (s)  of 
Section  3121   of  the  Internal  Revenue  Code  of   1954    (relating  to 
concurrent  employment  by  2  or  more  employers)   — 

"(1)      the  following  entities  shall  be  deemed  to  be 
related  corporations   that  concurrently  employ   the  same 
individual  : 

"(A)      a  State  university  which  employs  health 
professionals  as  faculty  members  at  a  Health  Science  Center  that 
includes  a  College  of  Medicine,    and  one  or  more  of  the  following: 
a  College  of  Dentistry,    a  College  of  Public  Health,    a  College  of 
Nursing,    a  College  of  Veterinary  Medicine,    a  College  of  Health 
Related  Professions,    or  a  College  of  Pharmacy,    and  either 

"(B)      a  faculty  practice  plan  described  in  section 
501 (c) (3)   of  such  Code  and  exempt  from   tax  under  section  501(a) 
of  such  Code  -- 

"(i)      which  employs  faculty  members  of  such 
medical  school,    and 

"(ii)      30  percent  or  more  of  the  employees  of 
which  are  concurrently  employed  by  such  medical   school;   or 

"(C)      an  agency  account  of  a  State  university 
which  is  described  in    (a)(1)(A)   of  this  section  and  from  which 
there  is  distributed  to  faculty  members  of  any  of  the  colleges 
described  in   (a)(1)(A)  of  this  section,   payments  forming   a  part 
of  the  compensation   the  State,    or  such  State  university,    as  the 
case  may  be,    agreed  to  cause   to  be  paid  any  such  faculty  member, 
and 

"(2)     remuneration  which  is  disbursed  by  either: 

(A)     such  faculty  practice  plan   to  a  health 
professional  employed  by  both  of  the  respective  entities  referred 
to  in  paragraph   1(A)  and  (B)  of  this  section;  or 


1110 


(B)      such  agency  account   to  a  faculty  member  of 
any  of  the  Colleges  described  in    (a)(1)(A)   of  this  section 

shall  be  deemed  to  have  been  actually  disbursed  by  the  State,  or 
such  State  university,  as  the  case  may  be,  as  a  common  paymaster 
and  not  to  have  been  actually  disbursed  by  such  faculty  practice 
plan  or  agency  account,    as   the  case  may  be. 

"(b)     Effective  Date  —" 


The  need  for  the  Proposed  Legislation  emanates  from  the  unique 
manner  in  which  compensation  is  paid  certain  members  of  the 
respective  faculties  at  the  University  of  Florida  (the 
"University")  Health  Science  Center  in  Gainesville,  Florida  and 
at  the  University  of  South  Florida  in  Teunpa,  Florida  ("USF"). 

Based  on  our  informal  survey  of  medical  schools,  it  would 
appear  that  the  revenue  impact  of  the  Proposed  Legislation  would 
be  limited  in  scope.   More  particularly,  the  revenue  impact 
should  be  limited  to  the  employer's  share  of  FICA  that  would 
otherwise  be  paid  by  the  agency  funds  at  the  University  of 
Florida  and  the  University  of  South  Florida.   Assuming  (1)  a 
constant  FICA  tax  rate  and  (ii)  no  dramatic  increase  in  faculty 
compensation,  it  is  estimated  the  annual  revenue  impact  would  be 
less  than  $3  million.   These  dollars  would  otherwise  be  available 
to  support  (1)  the  respective  medical  colleges'  academic  and 
research  activities  and  (11)  the  delivery  of  health  care  services 
to  indigent  and  underfunded  patients. 

FACTUAL  BACKGROUND 

As  an  integral  part  of  their  respective  University  teaching 
or  research  activities,  or  both,  members  of  the  respective 
faculties  of  the  University's  College  of  Medicine,  College  of 
Dentistry  and  College  of  Health  Related  Professions  (singularly, 
a  "College"  and  collectively,  the  "Colleges")  generate  patient 
fees  (collectively,  the  "Fees").   The  same  would  hold  true  for 
faculty  members  of  USF's  College  of  Medicine. 

Pursuant  to  rules  of  the  Board  of  Regents  of  the  State  of 
Florida  (the  "Board"),  each  such  faculty  member,  as  a  condition 
of  employment  by  the  respective  colleges,  agreed  that  all  Fees 
generated  by  his/her  faculty  activities  will  belong  to  and  be 
deposited  into  the  practice  plan  created  by  his/her  respective 
College.  There  Is  no  employment  relationship  between  any  faculty 
member  and  any  practice  plan. 

The  Florida  Clinical  Practice  Association,  Inc.,  a  Florida 
Not  for  Profit  Corporation,  which  Is  exempt  under  section 
501(c)(3)  of  the  Code  (the  "FCPA"),  is  the  repository  of  all 
patient  fees  generated  by  clinical  activities  of  any  member  of 
the  faculty  of  the  University's  College  of  Medicine.   From  time 
to  time,  subsequent  to  collection  of  the  Fees  by  the  FCPA  or  any 
other  practice  plan,  a  substantial  portion  of  such  plan's  monies 
are  deposited  into  an  identifiable  account  within  the  University 
of  Florida  agency  funds  (the  "University  Fund").   The  latter, 
Itself,  is  merely  a  statutorily  authorized  bank  account  outside 
of  the  State  Treasury.  The  FCPA  also  collects  a  portion  of  the 
patient  fees  generated  by  the  activities  of  faculty  members  of 
the  University's  College  of  Health  Related  Professions,  all  of 
which  fees  it  deposits  in  the  University  Fund.   The  University's 
College  of  Dentistry  effects  a  direct  collection  of  fees 
generated  by  its  faculty  members.   All  of  such  fees  are  deposited 
into  the  University  Fund. 

The  monies  in  the  respective  practice  plans  are  used  to 
support  (1)  the  educational  and  research  activities  of  the 


1111 


respective  Colleges  and  (ii)  the  delivery  of  health  care  services 
to  indigent  and  to  underfunded  patients.   Indeed,  the  FCPA,   the 
University's  College  of  Medicine's  practice  plan,  provides 
approximately  fifty-two  percent  of  that  College's  entire  budget. 

Additionally,  on  a  continuing  basis,  the  assets  of  a 
particular  practice  plan  are  the  means  by  which  a  significant 
capital  project  can  be  undertaken  by  the  University.   As  an 
example,  the  FCPA's  gross  revenues  are  the  main  source  of 
security  for  the  bonds  from  the  sale  of  which  emanated  the 
capital  to  build  and  equip  an  academic  research  building  at  the 
University's  Health  Science  Center. 

Each  faculty  member  is  employed  by  his/her  respective 
College  pursuant  to  a  single  contract  of  employment.   Pursuant  to 
pertinent  rules  of  the  Board,  the  compensation  provided  for  in 
such  contract  is  approved  annually  by  (i)  the  Dean  of  the 
respective  College,  (ii)  the  University's  Vice  President  for 
Health  Affairs,  and  (iii)  the  President  of  the  University. 
Pursuant  to  the  single  contract  of  employment,  each  faculty 
member  is  compensated  for  services  rendered  in  his/her  role  as  a 
teacher  for  both  his/her  teaching  duties  and  for  health  care 
services  provided  individuals  concomitant  to  those  teaching 
responsibilities.   For  a  substantial  portion  of  the  pertinent 
faculty  members,  payment  of  total  compensation  is  effected  in  the 
form  of  two  documents:   a  warrant  from  the  State  Treasury  and  a 
check  from  the  University  Fund.   The  pertinent  compensation 
payments  from  the  University  Fund  represent  a  procedure  of 
paying  such  faculty  member's  compensation  with  both  State  and 
University  Fund  provided  monies. 

As  noted,  a  faculty  member  is  employed  by  the  University 
pursuant  to  a  single  contract  of  employment.   For  this  reason, 
the  Special  Act,  which  contemplates  a  duality  of  employers,  is  of 
no  benefit  in  this  situation.   Accordingly,  by  reason  of  such 
compensation  payments,  the  State  and  the  University  Fund,  for  its 
respective  component  of  such  member's  compensation,  each  issues  a 
Form  W-2  to  each  faculty  member  whose  total  compensation  is  fixed 
and  paid  as  indicated  in  the  first  and  last  sentences  of  the 
prior  paragraph,  respectively.   The  State  and  the  University  Fund 
have  separate  federal  taxpayer  identification  numbers.   Utilizing 
its  own  respective  taxpayer  identification  number,  the  State  and 
the  University  Fund  each  also  files  a  Form  941 . 

The  State,  by  reason  of  its  "Section  218  Agreement",  pays 
employer  FICA  taxes  and  withholds  employee  FICA  taxes  on  that 
portion  of  the  wages  paid  directly  by  the  State  to  each  affected 
faculty  member.   In  effecting  compensation  payments  on  behalf  of 
each  of  the  Colleges,  the  University  Fund,  as  required  by  the 
Internal  Revenue  Service,  also  pays  employer  FICA  taxes  and 
withholds  employee  FICA  taxes  as  if  it  were  an  employer  and  as  if 
the  State  had  not  caused  FICA  payments  to  be  made.   (This 
situation  is  presently  the  subject  of  a  controversy  between  the 
University  Fund  and  the  Internal  Revenue  Service.)   Such  is  the 
case  despite  the  fact  neither  the  State,  the  University,  any  of 
the  Colleges  nor  the  University  Fund  deem  the  University  Fund,  a 
mere  bank  account,  a  separate  employer.   Indeed,  an  appellate 
court  in  Florida  has  held  that  such  a  fund  is  not  an  employer. 
See.  Bryant  v.  Duval  County  Hospital  Authority,  et  al.  459  So.  2d 
1154  (Fla.  Dist.  Ct.  of  App,  1984). 

The  essence  of  the  matter  before  the  House  Ways  and  Means 
Coimnittee's  Subconunittee  on  Select  Revenues  is  the  payment  of 
"Double  FICA"  by  respective  agency  accounts  at  the  University  of 
Florida  (Gainesville,  Florida)  and  the  University  of  South 
Florida  (Tampa,  Florida).   The  situation  is  caused  by  the 
inability  (i)  of  the  agency  funds  to  utilize  Section  125(a)  of 
Public  Law  98-21  because  neither  is  a  practice  plan  and  an 
employer  and  (ii)  of  the  Comptroller  of  the  State  of  Florida  (a 
constitutional  officer)  to  agree  to  effect  payment  of  faculty 


1112 


compensation  in  a  manner  that  would  obviate  the  need  for 
legislation.   At  a  meeting  with  a  member  of  the  staff  of  the 
House  Ways  and  Means  Committee's  Subcommittee  on  Social  Security, 
amplification  of  point  (ii)  was  requested. 

As  the  agency  accounts,  particularly  the  University  of 
Florida  Agency  Fund,  attempted  to  prevent  the  "double  FICA" 
situation,  an  obvious  solution  presented  itself.   In  lieu  of 
multiple  sources  effecting  payment  of  the  compensation  due  under 
a  faculty  member's  single  contract  of  employment,  such  payment 
would  be  effected  solely  through  the  Office  of  the  Comptroller  of 
the  State  of  Florida  (the  "Comptroller"). 

In  an  attempt  to  effect  such  an  arrangement,  negotiations 
over  a  protracted  period  of  time  were  carried  on  with  top 
officials  of  the  Comptroller's  Office.   In  addition  to  members  of 
the  staff  of  one  of  the  involved  universities,  as  well  as 
assorted  legal  counsel,  the  meetings  were  attended  by  either  the 
Chancellor  of  Florida's  State  University  System  (the 
"Chancellor")  or  one  of  the  Vice  Chancellors. 

No  mutually  satisfactory  agreement  could  be  reached  with  the 
Comptroller.   Among  the  many  concerns  expressed  and  vigorously 
discussed  were  the  following: 

1 .  When,  if  at  all,  would  the  money  transferred  to  the 
Comptroller  by  the  respective  Agency  Fund  become  "state 
funds"?   What  legal  ramifications  would  result? 

If  the  funds  were  to  be  deemed  "state  funds",  the 
thought  was  that  a  marked  actuarial  adjustment 
under  the  Florida  Retirement  System  would  be 
required.   Having  just  recently  suffered  the 
economic  consequences  ($6  to  $7  million)  of  such  a 
re-adjustment,  the  University  of  Florida  College 
of  Medicine  was  less  than  enthusiastic  concerning 
such  a  possibility. 

2.  Non-academic  intrusion  into  the  academic  decision 
making  process. 

The  question  is  particularly  pertinent  in  the 
State  of  Florida.   Historically,  the  State's 
university  system  has  been  subjected  to  the  micro 
management  proclivities  of  both  the  legislative 
and  executive  branches  of  State  government.   At 
the  University  of  Florida,  faculty  practice  plan 
funds  represent  approximately  fifty-two  percent 
(52%)  of  its  College  of  Medicine's  budget,  while 
at  the  University  of  South  Florida,  fifty-five  per 
cent  (55%)  of  its  College  of  Medicine's  budget. 
Given  such  facts,  the  Chancellor,  along  with  the 
Academic  leadership,  felt  it  most  important  to 
ensure  academic  control  and  oversight  by  mandating 
funds  be  placed  in  an  agency  account,  thereby,  in 
turn,  assuring  continued  University  oversight. 

3.  Loss  of  flexibility  in  connection  with  fixing  the 
compensation  of  clinical  faculty.   At  a  time  when  the 
health  care  system  is  undergoing  tremendous  change, 
particularly  as  regards  physician  compensation,  the 
prospect  of  such  loss  of  flexibility  was  of  grave 
concern.   The  health  care  delivery  system  environment 
mandated,  it  was  felt,  affording  a  College  of  Medicine 
increased  flexibility  as  to  the  compensation  to  be  paid 
to  members  of  its  clinical  faculty  staff.   It  was 
thought  that  this  important  flexibility  element  would 
be  markedly  compromised  if  funds  were  deposited  with 
the  Comptroller. 


1113 


At  the  termination  of  these  negotiations,  the  Chancellor 
concluded  that  it  was  not  possible  to  frame  a  solution  that 
adequately  addressed  the  concerns  of  each  of  the  involved 
parties.   Accordingly,  it  was  impossible  to  arrange  for 
compensation  to  be  paid  from  one  source. 

AUTHORITIES 

In  other  situations,  such  duality  of  the  source  of 
compensation  has  not  prevented  a  result  similar  to  the  result 
that  the  Proposed  Legislation  would  provide.   For  example,  the 
Regulations  promulgated  under  Section  218  of  the  Social  Security 
Act  indicate  that 

"(W)here  an  individual  in  any  calendar  year  performs 
covered  services  as  an  employee  of  a  State  and  as  an 
employee  of  one  or  more  political  subdivisions  of  the 
State,  or  as  an  employee  of  more  than  one  political 
subdivision;  and  the  State  provides  all  the  funds  for 
the  payment  of  the  amounts  which  are  the  equivalent  to 
the  taxes  imposed  on  the  employer  under  FICA  on  the 
individual's  remuneration  for  services;  and  no 
political  subdivision  reimburses  the  State  for  paying 
those  amounts;  the  State's  agreement  or  modification  of 
an  agreement  may  provide  that  the  State's  liability  for 
the  contributions  on  that  individual's  remuneration 
shall  be  computed  as  though  the  individual  had 
performed  services  for  only  one  political  subdivision. 
The  State  may  then  total  the  individual's  covered  wages 
from  all  these  governmental  employers  and  compute 
contributions  based  on  that  total,  subject  to  the  wage 
limitations  in  Section  404.1047."   See  Regulation 
Section  404.1256. 


The  University  Fund,  of  course,  being  a  mere  bank  account,  cannot 
be  considered  a  political  subdivision  for  purposes  of  the 
foregoing. 

Acceptance  of  the  dual  source  of  funds  concept  is  also 
suggested  by  Code  Section  31 21 (u) (2) (D)  which  specifically  states 
that  all  agencies  and  instrumentalities  of  a  single  state  shall 
be  treated  as  a  single  employer.   This  language  manifests 
recognition  that  where  an  employee  of  a  state  performs  services 
for  more  than  one  agency  or  instrumentality  of  that  state  then 
such  service  will  be  viewed  as  services  for  a  single  employer. 
This  section  recognizes  the  singularity  of  the  employment 
relationship  and  limits  the  state's  liability  to  a  single  wage 
base  for  each  of  its  employees  for  all  agencies  and 
instrumentalities . 

A  similar  view  that  dual  sources  of  funds,  by  themselves, 
should  not  prevent  the  existence  of  a  single  employer  is  also 
suggested  by  the  legislative  intent  indicated  in  the  Senate  Bill 
Report  for  the  Special  Act.   That  law  amended  Code  section 
3121(b)  and  (s)  to  include  a  provision  applicable  when  a  state 
university  employs  health  care  professionals  at  a  medical  school 
and  a  tax-exempt  faculty  practice  plan  employs  a  significant 
percentage  of  those  same  physicians.   Given  such  a  situation,  the 
Special  Act  mandates  that  the  disbursements  by  the  faculty 
practice  plan  are  to  be  deemed  to  be  actually  disbursed  by  the 
university.   Thus,  the  singularity  of  the  employment  relationship 
is  clearly  recognized  amd  is  deemed  to  require  a  single 
calculation  of  the  wage  base.   In  short,  the  Special  Act  provides 
that  remuneration  disbursed  by  the  faculty  practice  plan  to  a 
health  professional  employed  both  by  the  plan  and  the  university, 
will  be  deemed  "to  have  been  actually  disbursed  by  such 
university  as  a  common  paymaster  and  not  to  have  been  actually 
disbursed  by  such  faculty  practice  plan."   Result:   one  FICA  tax 
payment,  in  a  situation  in  which  there  is  clearly  two  separate 


1114 


employers.   This  is  to  be  distinguished  from  the  University's 
situation  which  involves  one  employer  hiring  each  of  its  faculty 
members  pursuant  to  a  single  contract  of  employment  and 
compensating  such  faculty  members  from  two  sources. 

That  the  existence  of  two  paying  entities  could  give  rise  to 
a  situation  involving  two  taxpayer  identification  numbers  should 
be  of  no  significance.   A  review  of  Private  Letter  Rulings  makes 
it  at  once  apparent  that  such  a  situation  is  not  unknown  to  the 
Internal  Revenue  Service.   Private  Letter  Ruling  66091 64800A  (the 
"Letter  Ruling"),  for  instance,  contemplated  a  situation 
involving   two  separate  corporations,  A  and  B,  each  having  its 
own  taxpayer  (employer)  identification  number,  which  operated 
under  a  joint  contract.   Under  the  contract,  all  employees 
performed  duties  for  both  corporations.   Only  Corporation  A, 
however,  filed  employment  tax  returns. 

Addressing  the  question  as  to  which  corporation  had  the 
responsibility  for  filing  such  returns,  the  IRS  determined  that 
the  two  entities  were  truly  distinct  employers  and  therefore, 
each  should  file  Forms  941  and  940.   However,  for  those  years 
which  corporation  B,  had  failed  to  collect,  report  and  pay  FICA 
employee  tax,  it  was  relieved  of  doing  so,  since  corporation  A 
had  already  reported  and  paid  the  requisite  amounts.   In  order  to 
satisfy  the  IRS,  corporation  B  simply  attached  a  supporting 
statement  to  its  employment  tax  returns,  setting  forth  the  entire 
factual  situation,  that  is,  that  FICA  taxes  had  previously  been 
paid  by  corporation  A. 

Rev.  Rul.  57-22,  1957-1  C.B.  569  (the  "Revenue  Ruling")  also 
suggests  Internal  Revenue  Service  familiarity  with  dual  payor 
situations.   Factually,  the  Revenue  Ruling  was  concerned  with  a 
cooperative  agreement  between  a  federal  agency  and  a  state  for 
the  investigation  of  the  water  resources  of  the  state. 

Under  the  terms  of  the  agreement,  each  party  paid  a  certain 
amount  of  the  expenses  of  the  project.   The  agreement  also 
provided  that  tne  field  and  office  work  pertaining  to  the 
investigation  was  to  be  under  the  direction  of  the  federal 
agency.   The  state,  however,  agreed  to  carry  the  individuals  on 
its  payroll  and  to  make  payment  to  them  for  their  services. 

The  individuals  involved  in  the  project,  worked  for,  took 
orders  from  and  were  under  the  control  and  direction  of  the 
federal  agency.   The  state  payroll  claim,  however,  was  made  up  by 
the  federal  agency  and  approved  by  an  officer  of  the  state. 
Moreover,  the  state  did  not  select,  or  have  any  voice  in  the 
selection  of,  the  individuals  performing  the  services.   For  FICA 
purposes,  the  Revenue  Ruling  held  that,  based  upon  the  applicable 
common  law  rules  for  determining  an  employer-employee 
relationship,  the  individuals  were  employees  of  the  federal 
agency. 

SUMMARY: 

As  a  result  of  effecting  their  respective  contractually 
obligated  teaching  or  research  activities  concomitant  with 
patient  care  activities,  or  both,  members  of  the  respective 
faculties  of  the  Colleges  generate  Fees.   The  Fees  belong  to  and 
are  deposited  into  the  practice  plan  created  by  a  particular 
faculty  member's  respective  College.   From  time  to  time,  a 
particular  practice  plan  pays  a  substantial  portion  of  the  Fees 
to  the  University  Fund,  a  statutorily  authorized  bank  account 
outside  of  the  State  Treasury. 

For  services  rendered  in  his/her  role  as  a  teacher  and  in 
the  health  care  services  provided  as  incident  to  those  teaching 
responsibilities,  each  faculty  member  is  compensated  pursuant  to 
a  single  contract  of  employment.   Generally,  payment  of  such 


1115 


compensation  is  effected  in  the  form  of  two  documents:   a  warrant 
from  the  State  Treasury  and  a  check  from  the  University  Fund. 

An  obvious  solution  to  the  "double  FICA"  situation  --  i.e., 
all  payments  to  be  effected  solely  through  the  Comptroller  --  was 
not  available,  because  no  mutual  satisfactory  agreement  could  be 
reached  with  the  Comptroller.   His  office's  concerns  revolved 
around  questions  such  as  (i)  when,  if  at  all,  would  the  money 
transferred  to  the  Comptroller  by  each  of  the  agency  funds, 
become  "state  funds"  and  (ii)  what  would  be  the  legal 
ramifications  of  such  monies  becoming  state  funds,  such  as 
requiring  unacceptable  levels  of  actuarial  adjustments  in  Florida 
State  Retirement  System  contributions.   For  their  part,  the 
respective  agency  funds  were  concerned  about  ( i )  non-academic 
intrusion  into  the  academic  decision  making  process  and  (ii)  loss 
of  flexibility  in  connection  with  fixing  faculty  compensation. 

The  State  and  the  University  Fund  each  possesses  a  taxpayer 
identification  nximber.   Each  withholds  the  maximum  FICA  on  the 
compensation  paid  by  it;  albeit,  neither  deems  the  University 
Fund  either  an  employer  for  purposes  of  FICA  or  an  entity 
required  to  withhold  and  pay  over  FICA  taxes.   Rather,  given  the 
existence  of  separate  taxpayer  identification  numbers,  the  dual 
paying  over  and  withholding  was  utilized  solely  to  insure  the 
Treasury  Department  that  each  faculty  member's  total  compensation 
had  been  properly  recognized  for  FICA  purposes. 

The  Employment  Tax  Regulations  list  a  number  of  factors  to 
be  looked  to  in  determining  whether  an  "employer-employee" 
relationship  exists.   Treas.  Regs.  §31 .3401 (c)-1 (b) .   None  are 
present  in  the  instant  situation.   Manifestly,  there  is  but  one 
employer  --  the  State  of  Florida. 

The  concept  of  multiple  sources  of  payment  and  one  employer 
is  not  unique.   See  Regulation  Section  404.1256,  Code  section 
3121 (u) (2) (D),  Senate  Bill  Report  for  Section  125(a)  of  Public 
Law  98-21,  April  20,  1983,  PLR  6609164800A,  and  Rev.  Rul.  57-22, 
1957-1  C.B.  569.   There  being  one  employer,  the  University  Fund 
should  be  exempted  from  FICA  responsibility  to  the  extent  the 
State  has  carried  out  such  responsibility. 


1116 

Chairman  Rangel.  Mr.  Rosenkranz,  wliere  is  the  negotiation 
now?  Are  you  still  working  this  out  with  IRS? 

Mr.  Rosenkranz.  We  have  a  claim  for  refund  at  the  IRS.  It  is 
being  considered  by  the  IRS  at  the  agent  level. 

Chairman  Rangel.  Are  you  still  talking  with  them  or  is  the  opin- 
ion just  pending? 

Mr.  Rosenkranz.  My  30  years  of  practice  tell  me  the  opinion  is 
just  pending.  We  can't  break — frankly,  Mr.  Chairman,  I  can't  break 
through  the  agent  and  get  to  the  district  counsel's  office  to  speak 
lawyer-to-lawyer,  and  so  I  have  every  reason  to  believe  that  what 
we  are  going  to  get  is  a  denial  of  a  claim  for  refund  and  we  will 
have  to  follow  the  judicial  path. 

Chairman  Rangel.  Congressman  Ben  Cardin,  a  hard-working 
member  of  this  committee,  wanted  badly  to  be  here  to  introduce 
Mr.  Wright,  as  well  as  Mr.  Lazarus,  and  he  asked  me  through  staff 
to  extend  his  deepest  apologies,  as  well  as  indicating  that  he  will 
be  leaving  some  questions  for  Mr.  Wright  for  a  response  in  the 
record. 

Now,  as  I  understand  it,  Mr.  Holmes,  you  are  looking  for  an  ex- 
emption based  on  the  status  of  your  organization  that  would  relieve 
you  of  paying  taxes  for  the  employees? 

Mr.  Holmes.  We  represent  3,000  evangelical  Christian  schools. 
There  are  approximately  10,000  private  religious  schools  in  Amer- 
ica and  about  20  percent  of  them,  Jewish,  Catholic,  and  Protestant 
are  not  exempt  from  Federal  unemployment  tax.  Eighty  percent  of 
the  schools  that  are  members  of  our  association  are  owned  by  a 
church  or  they  are  affiliated  with  a  church. 

Chairman  Rangel.  I  understood  that  in  your  testimony.  Natu- 
rally, you  know,  we  try  to  protect  employees  in  case  of  job  losses 
and  unemployment,  and  what  you  are  saying  is  that  some  entities 
don't  have  to  provide  that  protection,  and  you  would  like  that  same 
type  of  exemption  from  taking  care  of  the  employees  in  case  of  job 
loss? 

Mr.  Holmes.  Well,  I  am  aware  of  religious  schools,  church 
schools  that  choose  to  cooperate  and  be  part  of  mandator — they 
are — if  you  are  in  a  church  situation.  It  is  not  mandatory,  but  you 
may  participate.  If  you  are  an  independent  board,  then  it  is  manda- 
tory. We  would  like  to  give  the  schools  the  option  to  choose  which 
way  they  elect  to  do,  just  as  church  schools  do. 

In  other  words,  they  would  not  have  to  participate  should  they 
not  want  to  or  they  could  if  they  chose  to. 

Chairman  Rangel.  I  assume  that  you  are  hired  to  make  certain 
it  is  not  mandatory  and  that  the  employee,  you  know,  would  not 
be  receiving  unemployment  benefits.  I  mean,  you  don't  have  any- 
thing to  say  about  the  merits  of  participating?  I  know  no  one  likes 
anything  to  be  done  mandatorily,  but  since  it  is  such  a  spiritual 
and  religious  institution,  you  know,  taking  care  of  employees  that 
are  out  of  work 

Mr.  Holmes.  We  have  asked  our  schools  to  very  carefully  look  to 
ways  that  they  can  provide  for  the  needs  of  their  teachers  and 
staff,  and  each  one  of  them  does  it  a  different  way,  but  we 
have 

Chairman  Rangel.  What  ways  do  you  do  that?  What  are  those 
ways  that  you  take  care  of  your  employees? 


1117 

Mr.  Holmes.  We  do  not  control  what  the  schools  choose  to  do, 
but  we  have  encouraged  them  to  provide  benefits.  As  a  matter  of 
fact,  we  do  annual  surveys  of  what  benefits  are  provided  to  encour- 
age them  to  have  more  benefits,  including  retirement  and  ways  of 
providing  for  the  needs  for  their  family. 

Chairman  Rangel.  But  you  don't  know  of  any  method  that 
they — they  haven't  told  you  how  they  would  like  to  do  that, 
though? 

Mr.  Holmes.  Well,  having  served  as  a  superintendent  of  schools 
in  California,  where  there  was  a  situation  of  having  attached  to 
FUTA  health  care  benefits  in  case  a  person  was  hurt  off  the  job, 
we  provided  that  through  a  private  agency. 

Chairman  Rangel.  Why  do  you  think  the  religious  institutions 
are  exempt  from  mandatory  coverage? 

Mr.  Holmes.  Congress  chose  to  exempt  churches  and  church-af- 
filiated entities  from  this  law,  and  we  feel  that 

Chairman  Rangel.  Why? 

Mr.  Holmes.  Because  they  are  a  religious  institution  and  this  is 
a  form  of  taxation. 

Chairman  Rangel.  It  is  a  form  of  protecting  the  employees,  isn't 
it?  I  don't  see  any  more  reason  why  there  should  be  any  exemp- 
tions, personally,  and  so  if  you  protect  the  employees  iust  because 
your  boss  is  spiritual,  that  doesn't  mean  that  the  employee  should 
not  be  protected,  in  my  opinion.  In  any  event,  there  is  no  moral 
basis  for  it.  You  just  believe  that  in  a  sense  similar  type  institu- 
tions get  the  exemption  from  mandatory  coverage  for  employees, 
that  just  because  your  structure  is  different  and  you  also  are  spir- 
itually motivated  to  take  care  of  the  helpless,  that  you,  too,  should 
not  have  to  do  it  mandatorily,  but  from  the  deep  spirit  in  which 
you  feel  when  you  want  to  do  it.  OK 

Mr.  Holmes.  Yes,  sir. 

Chairman  Rangel.  Mr.  Wright,  you,  I  gather,  as  relates  to  de- 
preciation and  the  alternative  minimum  tax,  believe  that  you  are 
better  off  under  the  new  law,  but  not — the  past  legislation,  but  it 
is  not  as  liberal  as  you  would  like  to  see  it. 

Mr.  Wright.  The  new  law  deals  with  basically  simplification  is- 
sues, which  are  very  significant  and  very  useful,  but  it  does  not  ad- 
dress the  issues  concerning  what  we  think  was  an  incorrect  change 
included  in  the  1986  law  concerning  the  lengthening  of  the  depre- 
ciation period  for  automobiles  and  light  trucks.  Based  upon  the 
1991  Treasury  Department  study  mandated  by  Congress,  the  de- 
preciation period  for  automobiles  and  light  trucks  is  much  longer 
than  it  should  be. 

Chairman  Rangel.  The  bakers'  problem  is  one  of  the  distributors 
being  considered  as  employees? 

Mr.  Fanelll  Mr.  Chairman,  if  I  may  take  that  question,  the 
bakers  in  the  baking  industry  and  the  distributors  in  the  baking 
industry  are  not  looking  for  classification  as  independent  contrac- 
tors. We  have  no  reason  to  claim  special  treatment  in  that  area, 
and  we  think  whether  or  not  these  individuals  are  independent 
contractors  or  employees  should  be  judged  by  the  same  20-step  test 
that  the  IRS  and  the  courts  have  imposed  on  everybody  in  the  in- 
dustrv. 


77-130  0 -94 -4 


1118 

The  problem  here  is  a  statute  adopted  in  1950  which  said  essen- 
tially that  even  if  you  were  an  independent  businessman  for  pur- 
poses of  FICA  tax,  you  would  be  treated  as  a  statutory  employee 
under  certain  limited  circumstances.  At  the  time  that  law  was 
passed,  the  difference  between  FICA  and  SECA  rates  was  signifi- 
cant. The  intent  of  Congress  to  make  sure  that  bakery  drivers  had 
the  benefit  of  the  higher  FICA  contribution  rate  and  therefore 
higher  benefit  payment  at  their  retirement  was  primarily  the  moti- 
vation for  the  statute.  That  is  no  longer  the  case.  The  rates  are 
substantially  identical  for  both  FICA  and  SECA,  so  there  is  no 
positive  benefit  to  this  statute  anymore,  and  it  significantly  threat- 
ens the  ability  of  the  industry  to  establish  independent  contractor 
relationships,  which  have  worked  very  effectively  and  efficiently  in 
this  industry,  to  create  the  kind  of  success  stories  that  Mr.  Cox  re- 
lated to  the  committee  this  morning. 

Chairman  Rangel.  Is  there  any  controversy  as  relates  to  the 
unions  involved  in  the  relief  that  you  are  seeking? 

Mr.  Fanelli.  I  am  not  aware  of  any,  Mr.  Chairman.  The  indus- 
try has  functioned  substantially  identically  to  the  way  it  functions 
today  since  1950,  and  this  issue  becomes  important  todav  only  be- 
cause the  IRS  has  recently  changed  its  interpretation  of  the  statute 
and  taken  the  position  that  the  money  that  these  people  invest  in 
purchasing  these  distributorships,  which  can  be  very  substantial 
amounts  of  money,  does  not  constitute  an  investment  in  facilities 
under  the  statute. 

Early  in  the  1950s  they  took  the  position  that  it  did  constitute 
an  investment,  and  they  continued  to  take  that  position  on  an  un- 
broken basis  for  40  years,  and  it  is  only  in  the  last  2  years  that 
they  have  reversed  themselves  on  that. 

Chairman  Rangel.  Mr.  Lazarus,  did  you  include  in  your  testi- 
mony what  benefits  institutions  such  as  yours  intend  to  receive 
from  charitable  donations  if  the  legislation  is  changed? 

Mr.  Lazarus.  The  major  benefit  would  be  primarily  electronic, 
computer-related  equipment  that  could  be  used  by  faculties  of  our 
institutions  in  developing  research  on  the  applications  of  design. 
This  is  now  not  being  supported  through  contributions  of  equip- 
ment because  of  the  way  the  Teix  Code  is  written. 

Chairman  Rangel.  And  what  type  of  art  and  design  would  that 
be? 

Mr.  Lazarus.  It  is  related  primarily  to  the  design  field,  and  those 
would  include  all  applied  design  from  industrial  design,  automotive 
design,  fashion  design,  textile  design  to  the  graphic  arts,  and  pack- 
aging design  as  well. 

Chairman  Rangel.  Is  there  a  group  of  educators  in  this  field 
that  support  this?  This  is  not  just  your  institute. 

Mr.  Lazarus.  No,  I  am  here  representing  the  Association  of  Inde- 
pendent Colleges  of  Art,  which  includes  all  of  the  independent  col- 
leges. Most  of  the  comprehensive  universities  in  this  country  have 
been  able  to  receive  this  equipment  because  they  offer  degrees  in 
the  biological  and  physical  sciences.  Because  we  are  independent 
colleges,  we  are  excluded  from  those  gifts  because  we  don't  have 
those  degree  programs. 

Chairman  Rangel.  But  the  independent  colleges,  they  are  formal 
associations? 


1119 

Mr.  Lazarus.  Yes. 

Chairman  Rangel.  Mr.  Hancock. 

Mr.  Hancock.  Thank  you,  Mr.  Chairman. 

Mr.  Wright. 

Mr.  Wright.  Yes,  sir. 

Mr.  Hancock.  OK  I  have  two  or  three  questions  that  I  would 
like  to  ask  you.  I  think  what  we  are  talking  about  is  decreasing  the 
length  of  time  required  for  depreciation  of  leased  vehicles,  primary 
vehicles.  What  do  you  estimate  the  life  to  be  for  a  vehicle  used  in 
business?  What  would  be  the  proper  number? 

Mr.  Wright.  In  our  fleet,  which  I  think  is  representative  of  the 
industry  and  business-use  fleets  generally,  it  is  between  27  and  29 
months.  You  need  to  keep  in  mind  that  vehicles  in  that  category 
are  generally  averaging  in  excess  of  2,000  miles  per  month,  so  that 
level  of  use  is  a  major  factor  of  the  length  of  the  vehicle's  term. 

Mr.  Hancock.  The  lease  cars  that  they  are  using  now  on  the 
daily  rentals,  the  companies  don't  keep  them  in  service  for  any- 
thing close  to  that  length  of  time? 

Mr.  Wright.  No,  sir. 

Mr.  Hancock.  If,  in  fact,  we  did  reduce  the  time  for  depreciation, 
do  you  have  an  estimate  of  how  this  could  affect  the  economy? 

Mr.  Wright.  Well,  I  think  it  is  important  to  recognize,  as  I  said 
in  my  testimony,  that  well  over  95  percent  of  our  industry  is  buy- 
ing vehicles  manufactured  by  domestic  manufacturers.  In  PHH's 
case  the  average  is  about  97  percent.  The  ripple  effect  of  the  auto- 
mobile industry  in  glass  and  steel  and  plastic  and  the  rubber  in- 
dustry would  have  a  dramatic  stimulus,  I  believe,  to  the  economy, 
particularly  at  this  point  in  time  when  the  automotive  industry 
seems  to  be  coming  out  of  the  doldrums.  It  is  not  the  time  to  be 
sending  a  message  on  reducing  tax  benefits  on  these  business-use 
assets. 

Mr.  Hancock.  Well,  if  we  were  going  to  make  the  depreciation 
deductions  equal  the  loss  of  the  value  of  the  car,  what  would  the 
tax  law  have  to  say?  Would  it  be  straight  line  depreciation?  I  think 
we  are  using  straight  line  depreciation  in  my  company. 

Mr.  Wright.  Obviously,  you  can  come  up  with  numbers  using  a 
combination  of  changing  both  the  depreciation  period  as  well  as  the 
methodology  of  declining  balance.  The  Treasury,  when  they  devel- 
oped their  study  which  concluded  that  2.8  years  was  the  correct 
number  for  business  fleet  vehicles,  that  was  based  upon  a  straight 
line  determination,  but,  again,  that  rate  of  depreciation — straight 
line — and  depreciable  life  of  2.8  years  is  only  equal  to  economic  de- 
preciation without  any  incentive  at  all.  We  think  that  4  years  at 
150  percent  or  5  years  at  a  200  percent  declining  balance  also 
would  reach  economic  depreciation.  Again,  these  combinations  of 
rates  and  lines  do  not  produce  any  tax  incentive,  as  other  assets 
have,  but  would  basically  reach  only  economic  depreciation. 

Mr.  Hancock.  Well,  isn't  there  a  cap  on  vehicles  now,  the  maxi- 
mum amount  that  you  can  depreciate  on  a  business  car? 

Mr.  Wright.  It  is,  for  the  so-called  luxury  cars,  the  types  of  vehi- 
cles that  we  are  talking  about  in  the  business  fleets  generally 
range  from  $12,000  to  $15,000  and  are  below  that  maximum  cap. 

Mr.  Hancock.  Thank  you. 


1120 

Chairman  Rangel.  Mr.  Cardin  has  arrived,  but  before  I  recog- 
nize him,  are  there  any  other  members  who  are  seeking  recogni- 
tion? 

Mr.  Shaw. 

Mr.  Shaw.  Thank  you,  Mr.  Chairman.  I  will  be  very  brief.  I  ap- 
preciate being  allowed  to  sit  with  this  subcommittee  of  the  commit- 
tee that  we  all  belong  to,  the  Ways  and  Means  Committee,  and  I 
am  here  because  of  Mr.  Rosenkranz'  testimony  and  what  he  has 
put  forth  for  the  University  of  Florida.  I  very  much  side  with  his 
testimony  as  to  what  needs  to  be  done.  I  think  it  is  very  clear  here, 
and,  Mr.  Chairman,  I  think  you  voiced  a  sensitivity  to  his  testi- 
mony. What  they  are  seeking  is  more  of  a  technical  change  or  a 
technical  correction,  I  should  say,  rather  than  a  substantive  change 
in  the  code. 

When  we  get  into  a  situation,  as  we  are  today,  where  we  are  try- 
ing to  bring  the  cost  of  health  care  down,  admittedly,  this  is  a  very 
small  speck  on  the  total  question  of  health  care.  However,  it  is  a 
substantial  amount  of  money  to  the  State  university  system,  which 
I  think  should  certainly  be  recouped  by  them.  I  would  hope  that 
this  would  be  put  into  law,  if  Mr.  Rosenkranz  is  not  successfiil  with 
bringing  the  Internal  Revenue  Service  around  without  the  neces- 
sity of  legislation.  I  think  that  this  should  certainly  appear  as  a 
substantive  change  to  the  law  should  the  IRS  not  side  with  or  not 
fully  understand  the  point  that  he  is  making. 

It  is  clearly  double-dipping.  It  is  clearly  taxpayers'  money  from 
the  residents  of  the  State  of  Florida  that  is  being  double  taxed  on 
the  same  employee,  and  I  think  that  the  merits  are  clearly  on  his 
side  and  the  side  of  the  university  system  of  the  State  of  Florida. 
I  would  just  like  to  add  my  comments  to  the  record  in  that  regard. 

Thank  you,  Mr.  Chairman. 

Chairman  Rangel.  Thank  you,  Mr.  Shaw. 

Mr.  Kopetski  passes,  and  the  Chair  recognizes  the  distinguished 
Representative  from  Baltimore,  Md. 

Mr.  Cardin.  Thank  you,  Mr.  Chairman.  I  want  to  thank  you  for 
including  on  this  panel  two  representatives  from  Maryland,  Mr. 
Wright,  who  is  from  PHH,  who  has  done  yeoman's  service  in  our 
community.  I  just  really  want  to  thank  him  for  appearing  here 
today  and  welcome  him  to  the  Ways  and  Means  Committee. 

He  brings  an  issue  to  our  committee  which  I  think  is  extremely 
important,  and  that  is  to  try  to  bring  a  little  bit  more  economic  re- 
ality to  the  depreciation  schedules  used  on  leased  vehicles.  I  hope 
that  we  will  be  able  to  look  into  this  matter  and  to  try  to  adjust 
the  tax  treatment  to  the  realities  of  the  real  world  as  to  the  useful 
life  of  the  automobiles  involved. 

Also,  I  would  like  to  welcome  Fred  Lazarus  to  the  Ways  and 
Means  Committee.  Fred  has  brought  to  our  attention  a  matter  that 
is  extremely  important  to  many  of  the  private  institutions.  Fred 
has  done  a  great  service  to  our  community  at  the  Maryland  Insti- 
tute College  of  Art,  and  it  is  a  pleasure  to  have  him  here. 

I  would  like  to  ask  a  question,  if  I  might,  to  Mr.  Lazarus  as  to 
the  Treasury's  view  on  the  legislation  that  is  pending.  Treasury 
has  basically  indicated  that  they  are  not  sure  that  this  legislation 
is  needed,  because  private  gifts  to  your  types  of  institutions  have 
been  keeping  pace  with  need.  I  am  wondering  whether  you  could 


1121 

comment  as  to  whether  the  private  gifts  have  kept  pace  with  the 
needs  of  your  colleges  as  the  Treasury  release  would  have  this  com- 
mittee believe. 

Mr.  Lazarus.  I  can  speak  both  personally  and  on  behalf  of  oth- 
ers. I  have  had  corporations  that  are  in  the  business  of  developing 
equipment  in  the  fields  of  design,  particularly  computer  equipment, 
that  have  indicated  to  me  that  they  would  not  provide  that  equip- 
ment to  my  institution  because  we  do  not  qualify  under  this  section 
of  the  bill,  and  have  proceeded  to  support  university  programs  that 
have  biological  and  physical  science  programs  with  these  gifts.  So 
there  is  no  question  that  I  and  other  institutions  have  been  person- 
ally experiencing  the  fact  that  we  do  not  receive  gifts  that  would 
make  a  tremendous  difference  to  us. 

There  is  no  question  that  some  of  the  large  universities  have 
been  able  to  secure  these  gifts  because  thev  do  have  the  qualifica- 
tions of  providing  degrees  in  the  biological  and  physical  sciences. 

Mr.  Cardin.  So  a  company  can  make  a  gift  to  one  college  but  not 
to  another  because  of  the  quirk  in  the  current  structure? 

Mr.  Lazarus.  In  your  district,  in  the  Baltimore  area,  an  institu- 
tion like  the  University  of  Maryland,  Baltimore  County  can  receive 
a  gift,  and  we  cannot.  That  is  correct. 

Mr.  Cardesi.  I  certainly  want  UMBC  to  receive  a  gift,  but  would 
also  like  to  see  you  qualified  to  receive  a  gift.  Thank  you,  Mr. 
Chairman. 

Chairman  Rangel.  On  behalf  of  the  full  committee,  I  thank  this 
panel  for  the  changes  in  laws  recommended.  Staff  may  be  getting 
in  touch  with  you  if  there  are  any  other  questions  that  members 
have  and  they  have  not  had  a  chance  to  ask.  Thank  you  very  much. 

The  next  panel,  representing  the  Screen  Actors  Guild,  the  Amer- 
ican Federation  of  Television  &  Radio  Artists,  and  the  Actors'  Eq- 
uity Association,  is  a  person  well  known  in  the  arts  from  the  city 
of  New  York,  Ron  Silver.  Also  on  this  panel  we  have  Mark  J. 
Weinstein,  counsel  from  Squadron,  EUenoff,  Plesent,  Sheinfeld  and 
Sorkin  from  New  York. 

We  also  will  be  listening  to  Lawrence  O'Toole,  president  and 
CEO  of  Braintree,  Mass.,  representing  the  New  England  Education 
Loan  Marketing  Corp.  and  the  Education  Finance  Council.  Rep- 
resenting R.R.  Donnelly  &  Sons  Co.  from  Chicago,  Frank  Uvena, 
senior  vice  president.  Representing  the  American  Financial  Serv- 
ices Association,  Richard  Romeo,  chairman  of  the  tax  committee. 
That  concludes  this  panel. 

Mr.  Silver,  it  is  good  to  see  you  once  again.  We  all  admire  the 
excellent  performances  that  you  give  and  those  of  us  from  New 
York  are  proud  to  have  you  be  included  in  our  number.  The  com- 
mittee is  anxious  to  hear  your  thoughts  on  the  tax  provision  as  to 
deductibility  for  unreimbursed  business  expenses. 

STATEMENT  OF  RON  SILVER,  PRESmENT,  ACTORS'  EQUITY 
ASSOCIATION;  ALSO  ON  BEHALF  OF  SCREEN  ACTORS  GUILD, 
AND  AMERICAN  FEDERATION  OF  TELEVISION  &  RADIO  ART- 
ISTS; ACCOMPANIED  BY  MARK  J.  WEINSTEIN,  COUNSEL 

Mr.  Silver.  Thank  you  very  much,  Mr.  Chairman.  Before  I  begin 
I  would  like  to  introduce  counsel  here,  Mark  Weinstein. 


1122 

Mr.  Weinstein.  Good  morning,  Mr.  Chairman,  members  of  the 
committee.  Thank  you  for  allowing  me  to  speak  today.  I  am  Mark 
Weinstein.  I  am  a  partner  in  Squadron,  Ellenoff,  Plesent,  Sheinfeld 
and  Sorkin. 

We  are  tax  counsel  to  several  performing  artists  unions,  which 
include  the  Screen  Actors  Guild,  the  American  Federation  of  Tele- 
vision &  Radio  Artists,  Actors'  Equity  Association,  and  the  Writers 
Guild.  As  you  know,  seated  to  my  left  is  Mr,  Silver,  a  distinguished 
performer  who  is  currently  the  president  of  Actors'  Equity  Associa- 
tion. Mr.  Silver  will  speak  on  behalf  of  the  performing  artists 
unions  in  support  of  a  proposal  to  increase  the  adjusted  gpross  in- 
come ceiling  of  section  62(a)(2)  of  the  Internal  Revenue  Code  from 
$16,000  to  $32,000. 

We  encourage  Congress  to  further  promote  a  policy  of  tax  fair- 
ness to  the  lesser  known  struggling  actors,  musicians,  and  writers. 
These  persons  were  the  intended  beneficiaries  of  legislation  that 
was  enacted  in  1986.  In  a  nutshell,  Mr.  Chairman,  the  1986  tax 
provision,  although  enacted  with  good  intention,  simply  does  not 
work.  We  are  asking  you  to  correct  this  result. 

Mr.  Silver. 

Mr.  Silver.  Thank  you.  Mr.  Chairman,  my  children  went  back 
to  school  today.  It  was  their  first  day  in  school.  You  are  back  at 
work.  I  am  going  back  to  New  York  after  this  testimony.  I  wish  us 
all  well  this  year. 

On  a  personal  note  to  you,  sir,  being  a  distinguished  alumnus  of 
DeWitt  Clinton  High  School,  I  will  have  you  know  that  I  went  to 
Stuyvesant  High  Soiool  and  for  the  last  46  years  you  have  defeated 
us  in  football.  We  have  never  been  victorious  over  you,  so  I  trust 
that  you  will  show  us  some  kindness  today  in  our  presentation. 

Chairman  Rangel.  You  have  always  exceeded  in  the  arts  and 
sciences,  so  I  yield  to  you  in  that  field. 

Mr.  Silver.  Thank  you,  sir.  I  don't  have  to  tell  you,  you  know 
it  better  than  I  do,  that  when  legislation  is  enacted  sometimes  the 
original  legislative  intent  might  not  be  effected  and  revisiting  the 
original  legislation  and  amending  it  might  be  required  to  achieve 
the  bill's  original  intentions.  Justice  Scalia  notwithstanding,  I  be- 
lieve you  still  believe  that. 

I  am  not  here  on  behalf  of  Steven  Spielberg  or  Madonna,  Arnold 
Schwarzenegger,  Sylvester  Stallone,  Jack  Nicholson,  et  cetera. 
Congress  has  already  provided  all  the  protection  successful  people 
in  mj^  business  already  need.  They  can  form  personal  service  cor- 
porations and  they  can  incorporate  themselves  and  deduct  all  their 
business  expenses  above  the  line. 

I  am  here  on  behalf  of  the  vast  majority  of  the  members  of  the 
Actors'  Equity  Association,  the  Screen  Actors  Guild,  and  the  Amer- 
ican Federation  of  Television  &  Radio  Artists,  the  vast  majority 
who  are  not  able  to  deduct  their  legitimate  business  expenses.  And 
while  we  asked  for  this  change  in  1986,  we  are  partially  at  fault 
for  not  understanding  some  of  the  consequences,  and  it  has  had  a 
devastating  impact,  not  only  on  the  struggling  actors  and  musi- 
cians and  performing  artists,  but  on  the  mid-level  professionals. 

People  outside  of  our  business  tend  to  see  it  as  black  and  white. 
There  are  young  kids  struggling  to  get  into  the  business,  and  then 
there  are  very  successful  people  who  work  in  movies  and  on  stage 


1123 

and  in  TV.  The  reality  of  our  business  is  that  most  people  are  mid- 
level  professionals  that  are  eking  out  a  living  or  earning  a  basic 
subsistence,  married  and  with  children,  and  it  is  those  people  who 
I  am  speaking  on  behalf 

The  current  law,  section  62(a)(2),  which  amended  the  code  in 
1986,  was  part  of  that  Tax  Reform  Act.  The  reason  for  the  change 
then  was  to  allow  the  lesser  known  struggling  performers  and  mu- 
sicians to  deduct  their  job  search  and  other  business  expenses  such 
as  agent  and  other  representational  fees,  which  generally  run  10 
percent  or  more  and  costs  for  a  video  or  audiotapes. 

Now,  the  law  actually  stipulated  that  a  qualified  performing  art- 
ist was  permitted  to  deduct  their  allowable  section  162  expenses 
above  the  line.  To  qualify  for  a  QPA,  a  qualified  performing  artist, 
you  had  to  meet  three  criteria.  You  had  to  have  more  than  one  em- 
ployer in  the  performing  arts,  you  had  to  incur  allowable  section 
162  expenses  as  an  employee  in  connection  with  such  services  in 
the  performing  arts  at  an  amount  exceeding  10  percent  of  gross  in- 
come from  those  services,  and  you  did  not  have  an  adjusted  gross 
income  as  determined  before  deducting  the  expenses  in  excess  of 
$16,000. 

Now,  what  was  wrong  with  this  was  the  law  did  not  provide  the 
relief  to  the  intended  beneficiaries;  that  is,  the  lesser  known  strug- 
gling artists  and  the  mid-level  professionals.  The  facts  are  these: 
Based  on  1992  earnings,  less  than  5  percent  of  performing  artists 
fell  under  the  $16,000  adjusted  gross  ceiling. 

Now,  that  sounds  pretty  good.  That  means  95  percent  of  them 
earned  more  than  that,  so  what  am  I  here  complaining  about  and 
asking  you  here  to  do?  Unfortunately  about  92  percent  of  perform- 
ing artists  earn  less  than  $15,000  from  their  craft.  Now,  in  order 
to  earn  a  living  wage,  most  of  the  people  I  know  in  this  business 
have  to  supplement  their  income  by  doing  something  else.  They  are 
waiters,  they  are  lawyers,  they  are  carpenters,  they  are  doing  work 
that  will  allow  them  to  pursue  their  crafl  while  also  enabling  them 
to  earn  a  living  wage  to  support  themselves  and  their  families. 

Also  in  1987  unemployment  insurance  became  taxable,  so  if  you 
earned  $15,000  and  collected  $2,000  UIB  that  would  knock  you  out 
of  the  box  and  put  you  over  the  limit  as  well.  What  I  have  here, 
and  I  would  like  to  submit  for  the  record  in  addition  to  the  written 
record,  are  two  tax  forms.  One  is  computed  under  the  1985  rules 
and  one  is  computed  under  the  current  rules,  and  if  you  assume 
that  the  taxpayer  is  a  performer  working  in  a  regional  theater, 
housing  is  usually  provided  for  them,  but  other  expenses,  including 
meals  are  paid  out  of  the  performer's  take-home  pay. 

If  the  performer's  weekly  salary  is  $425,  which  is  a  minimum  in 
a  regional  theater,  and  she  is  employed  for  40  weeks,  she  has 
earned  $17,000.  If  the  performer  spends  $15  a  day  on  food,  which 
is  not  terribly  generous  and  all  the  other  expenses  for  laundry, 
whatever,  total  $50 — that  is  about  a  $4,250  deduction.  If  she  has 
received  $2,000  in  unemployment  compensation,  under  the  reform 
act  intended  to  benefit  these  people,  the  performer  would  have  had 
a  Federal  tax  liabihty  of  $1,234.  She  was  entitled  to  deduct  all  her 
travel  expenses,  even  though  she  didn't  file  a  schedule  A  at  that 
point.  She  was  also  entitled  to  the  standard  deduction. 


1124 

Now,  under  the  current  postreform  rules,  the  performer's  tax  li- 
ability is  $1,969,  a  difference  of  $735  or  a  percentage  increase  of 
over  59  percent.  This  did  not  have  the  consequences  that  we  antici- 
pated. Now,  why  change  the  law  to  accomplish  what  was  originally 
intended?  Performing  artists  as  employees  continue  to  incur  costs 
associated  with  employment  that  strongly  resemble  costs  that  are 
incurred  by  independent  contractors,  not  employees,  and  I  can  give 
you  a  pretty  good  example  of  this  from  my  own  career  and  when 
I  started  out. 

If  I  earned  $1,000,  I  had  to  pay  $100,  10  percent  commission,  to 
an  agent.  You  have  no  choice.  Every  actor,  every  performer  has  an 
agent  in  the  business.  They  are  essentially  an  employment  agency. 
Now,  most  employers  pick  up  the  employment  agency  fee.  Actors 
who  are  currently  looking  for  work  over  and  over  and  over  again 
consistently  pay  this  employment  fee  of  10  percent.  In  order  to  con- 
tinue working  as  an  actor  where  I  earned  $1,000,  I  had  to  get  pho- 
tographs of  myself,  I  had  to  get  audiotapes,  videotapes,  I  had  to — 
in  addition  to  obvious  expenses  of  keeping  myself  fit  and  this  and 
that,  but  that  is  really  secondary.  There  were  necessary  expenses 
that  exceeded  30,  40  percent  of  my  income. 

Now,  why  we  are  asking  for  some  correction  of  that  1986  bill  is 
that  absent  a  change,  the  tax  burden  is  not  allocated  equally  to 
persons  of  the  same  dollar  gross  income.  If  you  are  a  ditchdigger 
and  you  earn  $16,000  and  most  of  your  expenses  are  paid  by  your 
employer,  you  have  an  aftertax  cash  income  of  $14,481.  Whereas 
a  performing  artist  earning  that  same  $16,000  and  incurring  typi- 
cal employee  expenses  of  20,  25  percent  of  earnings  or  $4,000  has 
an  aftertax  income  of  $10,000. 

In  1986  there  was  an  interesting  colloquy  on  the  floor  of  the  Sen- 
ate when  then  Senator  Wilson  spoke  very  eloquently  for  the  unique 
situation  of  artists  and  why  they  should  be  treated  perhaps  spe- 
cially in  this  area,  and  he  stated,  and  I  am  not  quoting  him  ver- 
batim now,  but  I  am  paraphrasing  him,  that  levying  a  tax  on  in- 
come, not  on  gross  receipts  is  a  concept  recognized  in  the  tax  treat- 
ments of  businesses,  corporate  or  not,  by  allowing  deductions  for 
ordinary  and  necessary  expenses  that  help  generate  income. 

If  an  employer  covered  such  expenses,  they  would  be  deductible 
to  the  employer  for  income  tax  purposes.  The  denial  of  deductions 
for  expenses  that  truly  serve  to  generate  income  is  not  simply  bad 
tax  policy,  it  is  not  fair:  Deductions  are  not  a  loophole.  Deductibil- 
ity of  legitimate  employee  expenses  ensures  that  our  Federal  in- 
come tax  does  not  become  a  gross  receipts  tax.  So  respectfully,  our 
proposal  would  be  that  if  you  could  see  your  way  clear  to  increase 
the  earnings  ceiling  to  $36,000,  indexed  for  inflation,  only  income 
earned  from  the  performing  artist  craft  be  counted  in  the  earning 
ceiling  and  the  earning  ceiling  should  be  tested  individually  for 
married  taxpayers.  If  two  people  are  married  and  they  are  both  ac- 
tors or  musicians  or  performing  artists  of  any  kind,  we  really  need 
an  individually  tested  ceiling  for  both. 

I  would  be  happy  to  answer  any  questions.  I  don't  want  to  take 
more  of  the  committee's  time. 

[The  prepared  statement  and  attachments  follow:] 


1125 


MEMORANDUM 


August  31,   1993 


PROPOSAL  ON  BEHALF  OF  PERFORMING  ARTISTS 
FOR  U.S.  TAX  LEGISLATION 


Films,  television  and  radio  shows,  theatrical  performances,  musical 
concerts  and  videos  are  among  the  nation's  most  valuable  trade  assets.  The 
works  created  by  United  States  filmmakers,  performers,  musicians  and 
technicians  are  dominant  in  virtually  every  market  on  every  continent  around  the 
world. 

American  films,  shows  and  concerts  are  the  best  in  the  world  because  of 
the  expertise  that  resides  in  America.  These  fine  artists  are  hardworking 
persons  who,  unfortunately,  currently  bear  a  disproportionately  greater  tax 
burden  than  workers  in  other  crafts.  Current  United  States  tax  policy 
inappropriately  penalizes  the  performing  artist  who,  of  necessity,  must  contend 
with  irregular  employment  patterns.  The  criteria  of  equity  and  fairness  in  the 
implementation  of  a  tax  structure  "demands  that  the  income-tax  burden  should  as 
far  as  possible  apply  equally  to  persons  of  the  same  dollar  income."' 

Performing  artists^  contribute  to  one  of  the  nation's  largest  export 
commodities  -  entertainment;  an  industry  that  returns  to  this  country  some  $4 
billion  in  surplus  balance  of  trade.  Most  other  industries  do  not  yield  such 
favorable  trade  balances  and  do  not  contribute  as  much  to  the  Gross  Domestic 
Product;  yet  employees  in  these  industries  do  not  suffer  the  tax  burdens  borne 
by  the  performing  artist  under  the  Internal  Revenue  Code. 

ACCORDINGLY.  THE  SCREEN  ACTORS  GUILD  ("SAG").  THE  AMERICAN  FEDERATION  OF 
TELEVISION  &  RADIO  ARTISTS  ("AFTRA')  AND  ACTORS'  EQUITY  ASSOCIATION  ("AEA"),  FOR 
THEMSELVES  AND  ON  BEHALF  OF  OTHER  UNIONS  REPRESENTING  PERFORMING  ARTISTS. 
RESPECTFULLY  REQUEST  THAT  CONGRESS  ENACT  LEGISLATION  TO  EXPAND  THE  APPLICATION 
OF  INTERNAL  REVENUE  CODE  SECTION  62(a)(2)  TO  MAINTAIN  PARITY  IN  TAX  TREATMENT 
BETWEEN  PERFORMING  ARTISTS  AND  OTHER  EMPLOYEES. 


CURRENT  LAW 

The  Tax  Reform  Act  of  1986  (Public  Law  99-514)  amended  the  Internal 
Revenue  Code  (the  "Code")  to  provide  an  actor  or  other  individual  who  performs 
service  in  the  performing  arts  (a  "performing  artist")  an  above-the-line 
deduction  for  his  or  her  employee  business  expenses  (allowable  under  section  162 
of  the  Code)  during  a  year  if  the  performing  artist  for  that  year  (1)  had  more 
than  one  employer  (excluding  any  nominal  employer)  in  the  performing  arts,  (2) 
incurred  allowable  Section  162  expenses  as  an  employee  in  connection  with  such 
services  in  the  performing  arts  in  an  amount  exceeding  10  percent  of  the 
individual's  gross  income  from  such  services,  and  (3)  did  not  have  adjusted 
gross  income,  as  determined  before  deducting  such  expenses,  exceeding  $16,000. 

In  the  six  plus  years  this  amendment  has  been  effective,  the  statute  has 
not,  in  practice,  accomplished  its  objective  of  providing  performing  artists 
parity  of  tax  treatment  with  that  accorded  to  other  laborers.^ 

The  $16,000  adjusted  gross  income  ceiling  of  Section  62(b)  has  virtually 
eliminated  the  intended  tax  benefit.  Based  on  1992  earnings  and  tax  information 


'  Surrey,  The  Congress  and  the  Tax  Lobbyist  -  How  Special  Tax  Provisions  Get 
Enacted,   70  Harv.L.Rev  1145  (1957). 

^    This  term  includes  both  persons  "in  front  of"  and  "behind"  the  camera. 

^  See  the  colloquy  among  former  Senator  Wilson  and  Senators  Packwood  and 
Bradley,  attached  hereto  as  Exhibit  A,  for  a  discussion  of  the  reasons  for  the 
amendment. 


1126 


for  SAG,  AFTRA  and  AEA  members,  less  than  5%  of  performing  artists  fell  under 
the  adjusted  gross  income  ceiling.  More  than  95%  of  the  performing  artists  had 
adjusted  gross  incomes  in  excess  of  the  $16,000  ceiling,  yet  their  earnings  from 
the  performing  arts  was  far  below  the  ceiling.*  Thus,  in  order  to  earn  a 
living  wage  performing  artists  must  supplement  their  performing  arts  income  with 
outside  earnings.  The  $16,000  income  ceiling  penalizes  the  performing  artist 
whose  earnings  from  all  sources  puts  him  or  her  above  the  ceiling.  This  is  an 
inappropriate  result  and  demonstrates  the  need  for  an  amendment  to  Section 
62(a)(2). 

BACKGROUND 

The  performing  artist,  while  generally  treated  as  an  employee  under  the 
income  tax  law,  incurs  costs  associated  with  his  or  her  employment  that  strongly 
resemble  costs  typically  incurred  by  an  independent  contractor.  This  situation 
arises  because  of  the  inherently  short-term  nature  of  any  particular  employment 
opportunity.  While  the  average  American  worker  will  stay  at  one  job  for  several 
or  more  years,  a  performing  artist's  term  of  employment  at  any  particular  job 
will  rarely  exceed  a  month  or  even  a  day.  Due  to  the  short-term  nature  of  his 
or  her  employment,  the  performing  artist  incurs  job  search  expenses  of  a  type, 
frequency  and  amount  that  are  not  generally  incurred  by  workers  in  other 
industries.  For  example,  an  actor  will  incur  expenses  for  travel  to  and  from 
various  audition  sites,  resumes,  video  or  audio  tapes,  photographic  portfolios, 
and  gratuities  to  theater  doormen. 

Perhaps  the  most  significant  and  unique  costs  incurred  by  a  performing 
artist  are  agent  and  other  representational  fees,  which  usually  are  10%  or  more 
of  the  artist's  gross  income.  No  other  class  of  employee  is  burdened  with  such 
a  fee.  In  other  industries  the  employer  pays  any  employment  agency  fee  and  gets 
the  benefit  of  a  tax  deduction  without  limitation. 

Additionally,  performing  artists  incur  other  out-of-pocket  expenses  that 
further  reduce  their  true  employment  income.  These  include  costs  of 
photographs,  musical  instruments,  costumes,  publicists  and  practice  facilities, 
as  well  as  costs  for  maintaining  physical  condition  and  personal  appearance. 
It  is  the  rare  instance  in  other  lines  of  employment  that  such  expenses  directly 
effect  a  person's  employment  opportunities  and  success. 

PROPOSAL 

To  fairly  allocate  the  income  tax  burden  to  performing  artists,  we 
respectfully  request  that  Congress  adopt  the  following  proposal: 

The  language  of  Section  62(b)(1)(C)  of  the  Code  be  amended  to  read  in  its 
entirety  as  follows: 

the  adjusted  gross  income  earned  by  such  individual  in 
the  performing  arts  for  the  taxable  year  (determined 
without  regard  to  subsection  (a)(2)(B))  does  not  exceed 
$36,000^  (increased  by  an  amount  equal  to  $36,000, 
multiplied  by  the  cost-of-living  adjustment  determined 
under  Section  1(f)(3)  for  the  calendar  year  in  which 
the  taxable  year  begins  (but  substituting  "calendar 
year  1992"  for  "calendar  year  1989"  in  subparagraph  (B) 
thereof));" 

Such  amendment  would  properly  reflect  the  intent  of  the  1986  changes  by 
establishing  a  clearer  relationship  between  the  earnings  of  a  performing  artist 
in  the  performing  arts  and  the  tax  burden  that  should  be  levied  on  such 
earnings.  A  performing  artist  should  not  suffer  a  tax  penalty  because  he  or  she 
must  supplement  his  or  her  income  with  income  from  odd  jobs  and  unemployment 


*  This  information  was  obtained  from  the  1992  federal  income  tax  returns  of 
a  representative  sample  of  performing  artists  and  from  earnings  reports 
maintained  by  SAG,  AFTRA  and  AEA.  Attached  hereto  as  Exhibits  B  through  D  are 
charts  which  show  an  analysis  of  1992  earnings  by  performing  artists. 

'  This  amounts  represents  the  median  earnings  of  families  in  the  United 
States  for  1992  as  provided  by  the  Bureau  of  Labor  Statistics. 


1127 


insurance  benefits  in  order  to  support  self  and  family.  Earnings  from  outside 
the  performing  arts  bear  no  relationship  to  the  performing  artist's  expenses 
incurred  in  the  performing  arts.  Such  outside  earnings  should  not  restrict  a 
performing  artist's  ability  to  deduct  allowable  business  expenses. 

The  proposed  amendment  establishes  a  ceiling  amount  which  would  provide 
a  living  wage  from  the  performing  arts  for  the  "lesser  known,  struggling  actors 
and  musicians,"*  which  was  the  intention  of  the  1986  legislation.  Such  a 
ceiling  would  not  benefit  any  of  the  "better  known"  performing  artists. 

CONCLUSION 

The  proposal  set  forth  herein  should  be  adopted  in  order  to  provide  equity 
and  fairness  to  performing  artists  who  necessarily  incur  business  expenses  of 
a  type,  frequency  and  amount  not  incurred  by  other  employees.  Otherwise  the 
performing  artist  will  continue  to  bear  a  higher  income  tax  burden  on  his  or  her 
true  economic  income. 


*     132  Cong.  Rec.  S  8132  (June  23,  1986).  See  Exhibit  A  for  the  complete 
text  of  former  Senator  Wilson's  statement. 


1128 

EXHIBIT  A 

132  Cong  Rec  5  8132  Monday,  June  23,  1986 

The  PRESIDING  OFFICER.  The  pending  business  is  the  committee 
substitute. 

Mr.  WILSON  addressed  the  Chair. 

The  PRESIDING  OFFICER.  The  Senator  from  California  has  the  floor. 

AMENDMENT  NO.  2157 

(Purpose:  To  allow  for  deduction  of  certain  expenses  related  to  an 
individual's  trade  or  business) 

Mr.  WILSON.  Mr.  President,  as  the  votes  on  the  Senate  floor  have  made 
clear,  there  is  broad  support  for  the  tax  reform  bill  as  it  was  reported  by  the 
Finance  Committee.  It  is  a  bill  that  I  enthusiastically  support,  and  it  is  a 
bill  that  I  hope  to  see  enacted  --  enacted  in  a  form  very  close  to  that  of  the 
bill  now  before  us. 

But  one  issue  I  believe  is  dealt  with  better  in  the  House  bill  is  the 
treatment  of  miscellaneous  business  expenses. 

Mr.  President,  while  there  are  many  commendable  reforms  to  be  undertaken 
as  part  of  tax  reform,  we  must  remember  that  we  are  levying  a  tax  on  income,  not 
gross  receipts. 

This  concept  is  well  recognized  by  the  tax  treatment  of  businesses,  be 
they  in  corporate  form  or  not,  by  allowing  deductions  for  ordinary  and  necessary 
expenses  that  help  generate  income.  A  broad  array  of  deductions  are  allowed, 
from  advertising  expenses,  association  dues,  and  costs  of  equipment  to  hand 
tools  and  typewriter  ribbons. 

Yet,  deductions  for  these  same  expenses  would  be  denied  by  the  Senate's 
tax  bill.  No  longer  would  carpenters  be  able  to  deduct  the  cost  of  tools  or  a 
police  officer  deduct  the  cost  of  uniforms.  Furthermore,  if  an  individual  loses 
his  or  her  job  and  incurs  significant  expenses  to  find  a  new  ons,  none  of  these 
expenses  would  be  deductible.  I  find  this  last  change  particularly  objectionable 
when  considering  all  of  the  money  we  spend  through  direct  Federal  payment  for 
unemployment  coverage  or  trade  adjustment  assistance  in  order  to  help  the 
unemployed. 

It  should  also  be  noted  that  if  an  employer  covered  such  expenses,  they 
would  be  deductible  by  the  employer  for  income  tax  purposes  --  and  they  would 
not  be  imputed  as  income  to  the  employees. 

Mr.  President,  denial  of  deductions  for  expenses  that  truly  serve  to 
generate  income  is  not  simply  bad  tax  policy,  it  is  not  fair. 

In  this  regard,  I  believe  that  the  House  took  the  proper  route  by  allowing 
for  the  continued  deductibility  of  these  employee  expenses,  while  imposing  a  1- 
percent  floor.  The  1-percent  floor  is  a  reasonable  threshold  that  allows  us  to 
lower  rates  while  imposing  a  relatively  small  burden  on  individual  taxpayers. 
Furthermore,  it  removes  a  significant  auditing  problem  for  minor  expenses  that 
may  be  only  tangentially  related  to  the  taxpayer's  employment,  thereby  reducing 
compliance  costs.  Unfortunately,  the  Senate  bill,  while  also  imposing  a 
1-percent  floor,  eliminates  the  deductibility  of  most  types  of  employee 
expenses.  Mr.  President,  elimination  of  the  employee  expense  deduction  is  not 
supportable  as  a  means  of  lowering  tax  rates,  for  the  deduction  is  not  a 
loophole,  nor  is  it  an  incentive  that  furthers  some  governmental  policy  that  we 
can  no  longer  afford  if  we  are  to  have  lower  tax  rates.  Rather,  deductibility 
of  legitimate  employee  expenses  ensures  that  our  Federal  income  tax  does  not 
become  a  gross  receipts  tax. 

Mr.  President,  in  order  to  show  the  impact  that  the  Senate  bill's 
treatment  of  employee  expenses  would  have,  I  want  to  highlight  one  type  of 
deduction  that  will  no  longer  be  allowed  and  its  effect  on  one  group  of 
employees  performing  artists. 

The  one  aspect  of  the  bill  that  I  am  referring  to  is  the  repeal  of  the 
deduction  for  expenses  incurred  to  search  for  new  employment.  This  change  will 


1129 


place  an  additional  burden  on  someone  looking  to  change  jobs,  and  will  be 
particularly  severe  for  anyone  who  is  unemployed. 

Within  the  group  of  unemployed,  the  change  envisioned  by  the  Senate  tax 
bill  could  have  a  devastating  impact  on  people  in  the  motion  picture,  music,  and 
television  industries,  as  well  as  those  who  ply  their  trade  on  the  stage  or  as 
models,  for  by  the  very  nature  of  their  profession,  their  costs  for  finding  new 
employment  recur  over  and  over  again  in  a  continual  fashion. 

That  is  why  I  have  prepared  an  amendment  to  the  tax  bill  in  order  to 
restore  the  deductibility  of  agency  fees  and  related  expenses  that  are  incurred 
for  the  purpose  of  finding  new  employment  of  limited  duration. 

Mr.  President,  what  makes  the  impact  disproportionately  severe  on  actors, 
producers,  directors,  musicians,  and  others  in  the  entertainment  industry  is 
that  such  individuals  are  constantly  looking  for  new  work,  with  the  assistance 
of  agents  and  others,  no  matter  how  talented  they  may  be.  Employment  is  always 
temporary,  for  regardless  of  how  successful  a  movie  or  television  show  you 
appear  on,  regardless  of  how  good  a  musician  you  are,  and  regardless  of  how 
successful  a  show  you  may  be  acting  in,  it  is  highly  unusual  that  the  length  of 
employment  will  extend  as  long  as  1  year.  Indeed,  the  employment  more  often  that 
not  lasts  only  a  few  months,  a  few  weeks,  or  even  1  day. 

Now,  the  bill  does  not  affect  all  similarly  situated  people  in  the  same 
fashion.  It  hurts  only  those  in  the  entertainment  industry  who  are  at  the  bottom 
of  the  ladder.  Those  at  the  top  are  unaffected  by  this  one  particular  change. 

The  reason  for  the  disparate  treatment  is  that  the  big-name  actors, 
musicians,  and  others,  have  most  often  formed  personal  service  corporations. 
And,  like  other  corporations,  the  cost  of  finding  new  business  is  an  ordinary 
and  necessary  business  expense  deductible  by  them.  Or  such  people  may  perform 
their  work  as  independent  contractors.  And  like  other  independent  contractors, 
the  cost  of  acquiring  new  work  is  deductible  to  them  as  independent  contractors. 

The  lesser  known,  struggling  actors  and  musicians  will,  when  they  can 
find  work,  be  hired  as  employees  --  and  their  agent  and  other  representational 
fees,  which  run  10  percent  or  more,  will  not  be  deductible.  Also  nondeductible 
will  be  the  costs  of  their  resumes,  which,  because  they  often  include  video  or 
audio  tapes  as  well  as  photographic  portfolios,  can  cost  hundreds  of  dollars. 

Unfortunately,  this  group  of  lesser  knowns  constitute  the  vast  majority 
in  the  entertainment  business.  According  to  the  New  York  Times,  of  the  50 
percent  of  the  members  of  Actors  Equity  that  work  during  the  year,  half  earn 
less  than  $4,500.  And  at  the  Screen  Actors  Guild,  70  percent  earn  less  than 
$2,000  per  year  at  their  craft.  At  the  American  Federation  of  Television  and 
Radio  Artists,  the  picture  is  somewhat  brighter,  but  even  there  the  median  pay 
is  $11,000. 

I  do  not  know  what  the  revenue  impact  would  be  of  a  remedial  change  to  the 
tax  bill  that  would  fix  this  problem.  But  I  do  know  that  leaving  the  bill  in 
its  present  state  would  unfairly  penalize  those  struggling  for  success  as 
entertainers,  for,  by  denying  them  deductions  for  legitimate  job-search  costs, 
the  kind  that  they  continually  must  incur,  it  would  make  it  even  more  difficult 
for  them  to  find  employment. 

I  ask  unanimous  consent  that  a  copy  of  this  amendment  No.  2157  be 
printed  in  the  Record. 

There  being  no  objection,  the  amendment  was  ordered  to  be  printed 
In  the  Record,  as  follows: 

On  page  1413  of  the  amendment,  strike  out  line  24  and  insert  in  lieu 
thereof  the  following: 

employer,  and 

"(4)  Expenses  for  obtaining  employment  of  limited  duration.  --  The 
deductions  allowed  by  part  VI  (sec.  161  and  following)  which  consist  of  agency 
fees  and  other  related  expenses  directly  related  to  the  seeking  of  employment 
of  limited  duration  in  the  taxpayer's  present  trade  or  business,  under 
regulations  to  be  prescribed  by  the  Secretary." 


1130 


Mr.  WILSON.  Mr.  President,  I  have  a  concern  as  I  have  stated  and  I 
know  that  that  concern  is  deeply  shared  by  my  colleague,  the  senior  Senator  from 
New  Jersey,  and  I  would  be  pleased  to  inquire  of  him  at  this  time  his  thoughts 
on  this  issue. 

Mr.  BRADLEY.  Mr.  President,  let  me  commend  the  distinguished  Senator 
from  California  for  raising  what  I  consider  to  be  a  short  coming  in  the  Finance 
Committee  bill.  Existing  law  allows  employees  to  deduct  ordinary  and  necessary 
expenses  incurred  in  performing  their  jobs. 

The  Finance  Committee  bill,  recognizing  this  provision  has  been 
abused  and  has  also  imposed  burdensome  recordkeeping  requirements,  made  some 
changes  I  believe  that  went  too  far.  I  believe  the  bill  went  too  far  in  making 
draconian  changes  in  this  area. 

I  say  to  the  distinguished  Senator  from  California  who  I  know  is  extremely 
sensitive  to  the  area  that  the  amendment  relates  to,  which  is  the  performing 
arts,  that  the  issue  is  even  broader  than  he  has  defined  it.  It  is  true  that 
performing  artists  will  be  particularly  hard  hit  by  disallowances  of  deductions 
of  employee  business  expenses  but  it  is  not  just  agency  fees,  and  I  think  the 
Senator's  statement  laid  that  out. 

It  is  not  just  agency  fees  that  we  are  talking  about  here  but  legitimate 
out-of-pocket  expenses  for  things  like  photographs,  musical  instruments, 
costumes,  publicists,  and  so  on,  that  are  legitimate  expenses  incurred  in 
producing  income  and  therefore  ought  to  be  deducted. 

I  would  say  to  the  Senator  that  although  performing  artists  are  an 
important  example  of  this,  a  very  important  example  of  this,  as  he  also 
correctly  pointed  out,  there  are  many  other  professions  that  would  be  affected 
by  a  draconian  provision  in  the  final  bill. 

Take,  for  example,  trades  people  like  carpenters  or  bricklayers,  or 
whatever.  They  have  to  furnish  their  own  tools  and  those  should  be  deductible. 
Expenses  of  those  employees  who  have  to  buy  their  own  uniforms  in  order  to  get 
a  job  ought  to  be  deductible.  All  these  expenditures  are  legitimate  business 
costs.  If  they  exceed  1  percent  of  the  floor  they  should  be  deductible. 

Let  me  say  to  the  distinguished  Senator  from  California  that  I  share  his 
concern  and  I  support  what  he  is  trying  to  do,  and  I  hope  that  the  conference 
will  restore  the  deduction  for  all  employees. 

Mr.  WILSON.  Mr.  President,  I  thank  the  Senator  from  New  Jersey  for  his 
comment.  I  know  that  he  has  been  very  much  concerned  with  the  same  problem,  and 
I  know  that  it  is  his  purpose  to  work  for  the  elimination  of  this  problem  in  a 
way  that  is  fair  and  equitable  and  that  will  allow  those  employees,  who  have  the 
myriad  of  expenses  of  the  wide  range  that  he  has  described  and  that  I  have 
touched  on  in  my  own  statement,  to  find  some  relief. 

I  wonder  if  I  might  inquire  of  the  chairman  of  the  Finance  Committee,  whom 
I  know  has  been  eager  to  keep  the  bill  in  its  present  form  and  as  free  of 
amendments  as  possible,  whether  or  not  his  views  are  compatible  with  those 
expressed  by  the  Senator  from  New  Jersey  and  the  Senator  from  California.  I  know 
that  he,  too,  is  aware  of  the  problem. 

Mr.  PACKWOOD.  I  am.  I  talked  to  the  Senator  from  New  Jersey,  and  the 
Senator  from  California  was  good  enough  to  talk  to  me  before  he  started  his 
comments  tonight. 

I  am  sympathetic  to  the  problem.  I  think  it  is  one  that  should  be 
addressed  on  a  broader  scale  than  one  or  two  occupations  or  professions.  That 
is  obviously  an  issue  in  conference  that  we  will  consider. 

Mr.  WILSON.  I  thank  the  distinguished  chairman  of  the  Finance  Committee. 

Mr.  President,  based  on  the  colloquy  that  we  have  had,  it  is  not  my 
purpose  to  pursue  the  amendment  at  this  time.  I  am  reassured  by  the  expressions 
here  on  the  floor  of  a  recognition  that  this  problem  Is  one  that  needs  to  be 
dealt  with.  I  will  look  forward  to  the  action  of  the  conferees  to  bring  equity 
to  it. 


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1134 

Chairman  Rangel.  I  know  you  have  to  leave  and  you  will  be  ex- 
cused. We  will  present  whatever  questions  to  you — first  of  all,  you 
know  the  committee  and  the  Congress  are  very  supportive  of  strug- 
gling people.  We  know  how  difficult  it  is  to  break  through.  It  is 
equally  as  difficult  for  us  to  determine  who  is  serious  about  being 
in  the  business  and  who  is  serious  about  whatever  they  do. 

We  are  going  to  have  to  work  to  attempt  to  fine  tune  this,  and 
if  you  don't  have  the  answer  today  you  can  think  about  it,  because 
nobody  in  the  business  would  want  someone  getting  deductions 
that  they  don't  really  deserve  merely  because  they  declare  them- 
selves as  wanting  to  be  considered  a  performer. 

I  can  understand  your  audio  tapes  and  your  agent  fees  and 
things  like  that.  You  weren't  implying  that  meals  should  be  de- 
ducted in  that,  were  you? 

Mr.  Silver.  Yes.  I  was  kind  of  explicit  about  it  in  my  example. 
Perhaps  I  shouldn't  have  been.  But  when  you  are  on  the  road  for 
40  weeks,  you  often  don't  have  facilities  where  you  can  cook  for 
yourself  or  do  that.  We  have  just  got  even  the  provision  where 
housing  has  been  provided.  Often  not  all  your  travel  expenses  to 
get  to  the  job,  $15  a  day. 

Chairman  Rangel.  As  long  as  you  agree  that  this  has  to  be 
shown,  that  is  in  connection  with  working  in  the  arts. 

Mr.  Silver.  Absolutely.  It  should  be  connected  to  how  much 
money  is  actually  spent. 

Chairman  Rangel.  You  see  the  problem  that  can  be  presented. 

Mr.  Weinstein.  Yes.  I  have  two  comments  to  make,  one  with  re- 
spect to  your  concern  about  those  who  are  not  really  in  the  busi- 
ness. I  believe  the  hobby  loss  rules  currently  in  the  Internal  Reve- 
nue Code  take  care  of  that  problem. 

Two,  with  respect  to  meals  and  travel,  the  provision  would  only 
govern  those  expenses  that  are  allowable  deductions  under  section 
162,  meaning  if  the  artist  is  away  from  home  for  less  than  a  year 
doing  a  road  show  and  the  expenses  are  otherwise  allowable  under 
section  162,  those  would  be  within  the  coverage  of  this  provision 
currently  and  hopefully  as  extended. 

Chairman  Rangel.  Besides  the  items  already  mentioned,  what 
other  deductions  do  you  think  would  be  equitable  in  this  area? 

Mr.  Silver.  Any  expenses  incurred  to  allow  them  to  generate  in- 
come, pursue  their  crafts  and  continually  look  for  new  work,  be- 
cause employment  in  my  field  is  always  temporary.  When  you  fin- 
ish a  job,  you  don't  know  when  the  next  job  is  coming,  or  if  there 
will  be  one.  If  somebody  is  earning  $30,000  or  $35,000  in  their  cho- 
sen profession,  something  that  they  allegedly  love  to  do,  it  is  very 
unlikely  that  they  will  be  doing  another  job  to  generate  more  in- 
come. If  people  are  lucky  enough  to  earn — $36,000  is  the  median 
for  a  family  of  four — if  they  are  lucky  enough  to  earn  that,  very  few 
of  them  are  pursuing  other  work  to  supplement  their  income  unless 
they  want  to  live  a  certain  way  which  we  would  not  have  it  be  al- 
lowable. That  is  why  we  are  asking  for  that  figure  at  that  point. 

Chairman  Rangel.  Mr.  Hancock. 

Mr.  Hancock.  When  you  say  "in  the  business,"  can  that  be  meas- 
ured fairly  easily  by  the  amount  of  income? 

Mr.  Weinstein.  That  is  correct,  sir. 


1135 

Mr.  Hancock.  If  you  are  really  in  the  business,  you  will  have 
some  income  from  it.  I  don't  understand  what  you  mean  by 

Mr.  Weinstein.  The  hobby  loss  rules  deny  deductions  for  ex- 
penses incurred  for  someone  who  is  not  really  in  the  business,  but 
instead  is  pursuing  a  hobby.  If  you  are  committed  to  being  a  per- 
forming artist,  there  is  always  an  opportunity  of  earning  $1,000, 
$10,000.  Given  the  commitment  of  time  and  effort  and  expenses 
that  the  performing  artist  incurs,  that  would  be  good  evidence  of 
whether  he  or  she  is  really  in  the  business. 

Mr.  Hancock.  Are  you  talking  about  being  able  to  deduct  ex- 
penses beyond  the  amount  of  income  from  other  sources?  That  is 
what  I  don't  understand.  You  can't  deduct  expenses  from  nothing, 
can  you? 

Mr.  Weinstein.  If  you  are  not  subject  to  the  hobby  loss  rule,  that 
means  all  expenses  are  allowable.  If  your  expenses  exceed  income 
and  your  total  income  threshold  is  under  $16,000,  under  current 
law  you  would  get  full  benefit  for  the  deductibility  of  your  allow- 
able expenses. 

Mr.  Hancock.  Thank  you. 

Chairman  Rangel.  Do  other  members  have  questions?  Mr. 
Kopetski. 

Mr.  Kopetski.  It  is  not  clear  if  nonperforming  art  income  is  in- 
cluded in  that  $16,000  ceiling  or  not. 

Mr.  Weinstein.  The  current  law  does  not  differentiate  between 
income  from  the  performing  arts  and  income  from  outside  the  per- 
forming arts. 

Mr.  Kopetski.  I  assume  that  new  performing  artists  are  not  tak- 
ing advantage  by  either  organizing  as  a  corporation,  a  personal  cor- 
poration, because  it  is  just  not  worth  filing  the  papers  and  spend- 
ing the  money  to  become  incorporated,  is  that  the  case? 

Mr.  Silver.  I  think  most  business  managers  would  tell  you  that 
that  only  pays  to  do  at  a  certain  income  level.  People  earning  so 
few  dollars,  it  probably  doesn't  pay  for  them  to  do  that. 

Mr.  Kopetski.  The  Tax  Code  requires  that  they  be  employees 
rather  than  declare  themselves  an  independent  contractor,  Thev 
would  not  meet  the  test  of  an  independent  contractor  even  thougn 
they  are  working  a  day  here,  maybe  a  week  there? 

Mr.  Silver.  One  of  the  mistakes  we  made  is  that  when  we  said 
"had  more  than  one  employer,"  we  didn't  take  into  account  where 
somebody  works  at  a  theater  in  Los  Angeles  or  Chicago  and  are 
employed  for  the  season,  and  are  lucky  to  be  so  employed,  and  they 
work  for  40  weeks,  don't  work  the  other  12  weeks,  and  they  have 
only  had  one  employer.  There  were  a  couple  of  things  that  we  were 
remiss  in  not  bringing  to  your  attention  in  1986. 

Mr.  Kopetski.  The  one  employer  would  be  stricken  from  the 
code — ^you  are  going  to  keep  the  one  employer  exemption? 

Mr.  Silver.  It  is  three-pronged.  To  qualify  as  a  performing  artist 
you  had  to  have  more  than  one  employer  in  the  performing  arts  be- 
cause we  assume  that  is  the  nature  of  the  business  everybody  does. 
But  we  didn't  take  into  account  some  people  who  are  employed  on 
a  long-term  basis  only  having  one  employer. 

Mr.  Kopetski.  Do  you  think  we  should  address  that  by  a  26- 
weeks-of-the-year  type?  Is  that  something  that  is  common,  in  other 
words,  in  the  theater? 


1136 

Mr.  Silver.  Yes.  We  have  a  lot  of  actors  who  are  employed  by 
one  theater  for  the  season  and  don't  find  employment  for  the  other 
20  weeks  they  are  not  working. 

Mr.  KOPETSKI.  Perhaps  we  should  try  to  address  that  issue  as 
well,  Mr.  Chairman. 

Oregon  has  a  growing  film  industry,  and  also  we  have  a  lot  of 
writers  living  there  because  of  our  great  quality  of  life  there.  I  won- 
der if  that  is  iust  my  impression,  or  is  it  true  that  with  airplanes 
and  faxes  and  modems  today  that  people  aren't  necessarily  living 
just  in  New  York  or  California  and  involved  in  the  performing  arts 
industry,  and  that  there  may  be  different  kinds  of  deductions  today 
if  they  are  a  screenwriter  or  playwrite,  et  cetera? 

Mr.  Silver.  That  is  correct.  Most  of  the  people  I  know,  if  they 
had  the  option,  would  probably  live  in  Oregon. 

Mr.  KOPETSKI.  New  York  is  a  nice  place  to  visit. 

Mr.  Silver.  I  like  it. 

Mr.  KOPETSKI.  Thank  you,  Mr.  Chairman. 

Chairman  Rangel.  You  are  welcome  to  stay,  but  recognizing  that 
you  have  a  pressing  schedule  in  New  York  we  thank  you  for  your 
testimony. 

The  committee  is  anxious  to  work  with  you  to  make  certain  that 
where  applicable  as  relates  to  aspiring  artists  that  at  the  same 
time  we  can  distinguish  between  them  and  others  that  are  just 
doing  it  for  a  hobby.  Thank  you  very  much. 

Mr.  Silver.  Thank  you  very  much,  Mr.  Chairman. 

Mr.  Weinstein.  Thank  you  very  much. 

Chairman  Rangel.  We  will  next  hear  from  Lawrence  CToole, 
president  and  CEO,  representing  the  New  England  Education  Loan 
Marketing  Corp. 

STATEMENT  OF  LAWRENCE  W.  OTOOLE,  PRESIDENT  AND 
CHIEF  EXECUTIVE  OFFICER,  NEW  ENGLAND  EDUCATION 
LOAN  MARKETING  CORP.,  AND  EDUCATION  FINANCE 
COUNCIL 

Mr.  O'Toole.  Thank  you  for  the  opportunity  to  appear  before  you 
today  in  support  of  H.R.  2603,  the  bill  introduced  by  Congressman 
Richard  Neal,  a  member  of  your  subcommittee,  and  Congressman 
Joseph  Moakley. 

My  name  is  Lawrence  O'Toole  and  I  am  the  president  and  chief 
executive  officer  of  Nellie  Mae.  I  am  before  you  on  behalf  of  Nellie 
Mae  and  on  behalf  of  the  Education  Finance  Council,  which  is  a 
trade  association  including  23  States  and  nonprofit  secondary  mar- 
kets involved  in  the  Federal  student  loan  programs,  thereby  rep- 
resenting virtually  all  of  the  nonprofit  student  loan  providers  and 
all  of  the  organizations  that  might  be  affected  by  this  bill,  if  en- 
acted. 

As  you  know,  the  recently  passed  Budget  Reconciliation  Act  in- 
cluded the  Student  Loan  Reform  Act  of  1993,  which  substantially 
altered  Federal  policy  in  this  area  and  the  28-year-old  public-pri- 
vate partnership  that  has  provided  student  loan  capital  for  genera- 
tions of  students. 

Under  this  legislation,  a  new  direct  Federal  loan  program  will  be 
phased  in  over  the  next  4  years,  increasing  to  a  level  of  60  percent 
of  total  national  student  loan  volume  in  1997-98.  Conversely,  the 


1137 

current  Federal  programs  are  expected  to  gradually  reduce  their 
volume  to  40  percent  of  new  loan  volume  by  that  time.  This  grad- 
ual and  halfway  solution  represents  a  compromise  between  the 
Clinton  administration's  desire  to  convert  fully  to  a  direct  loan  pro- 
gram and  those  in  Congress  who  were  concerned  that  abandoning 
the  current  system  without  first  testing  it  presented  too  great  a 
risk  to  the  delivery  of  funding  for  college  students. 

I  am  before  you  today  to  recommend  your  consideration  and  ap- 
proval of  Tax  Code  changes  which  we  believe  complement  these 
changes  in  Federal  education  policy,  but  which  fall  under  the  juris- 
diction of  the  Ways  and  Means  Committee  rather  than  the  Edu- 
cation Committees.  In  many  respects  these  complementary,  hand- 
in-glove  changes  mirror  the  policy  actions  taken  by  Congress  in 
1976  which  substantially  expanded  the  guaranteed  student  loan 
program  to  provide  access  to  student  loans  for  all  American  stu- 
dents and  concurrently  made  Tax  Code  changes  which  authorized 
the  creation  of  scholarship  funding  corporations,  organizations  such 
as  our  own. 

As  background,  there  are  21  scholarship  funding  corporations,  as 
defined  in  Tax  Code  section  150(d),  across  the  country  which  pro- 
vide secondary  market  support  and  services  in  the  Federal  student 
loan  programs.  Nellie  Mae  is  the  largest  of  these  and  the  fourth 
largest  student  loan  holder  in  the  country.  All  other  funding  schol- 
arship corporations  rank  among  the  100  largest  providers  of  stu- 
dent loan  capital  in  the  Federal  programs. 

We  have  been  and  can  continue  to  be  effective  stewards  of  Fed- 
eral policy,  providing  innovation  and  superior  administration  of 
these  programs.  Our  local  and  regional  focus  and  familiarity  with 
students,  colleges  and  lending  institutions  in  our  areas  contribute 
to  our  strong  performance.  As  an  example,  the  Department  of  Edu- 
cation recently  released  cohort  default  rates  by  a  lender,  and  in 
those  statistics  Nellie  Mae's  default  rate  was  less  than  half  of  that 
of  the  Student  Loan  Marketing  Association,  a  Gk)vemment-spon- 
sored  enterprise. 

Section  150(d)  of  the  code  defines  scholarship  funding  corpora- 
tions as  private  nonprofit  corporations  which  are  designated  by 
State  or  local  governments  and  the  activities  of  which  are  dedicated 
exclusively  to  the  Federal  student  loan  programs.  Since  1976  the 
code  has  permitted  these  private  nonprofit  organizations  to  issue 
tax-exempt  debt  to  fulfill  the  education  policy  objectives  of  the  Fed- 
eral Government. 

We  believe  that  the  Tax  Code  changes  that  we  seek  in  section 
2603  will  again  better  permit  our  organizations  to  contribute  to  the 
attainment  of  Federal  policy  obiectives  by,  one,  allowing  us  to  in- 
crease the  level  of  funding  which  we  can  efficiently  and  effectively 
provide  to  students  to  make  up  for  any  reduction  or  withdrawal  of 
commercial  lending  institutions  during  this  phase-down  period; 
two,  by  removing  the  restriction  that  our  nonprofit  activities  be  ex- 
clusively related  to  the  diminishing  Federal  loan  programs,  thus  al- 
lowing us  to  participate  in  activities  permissible  for  section 
501(c)(3)  organizations  generally;  and  three,  in  the  longer  term  pro- 
viding an  effective  transition  for  these  organizations  to  the  tax  pay- 
ing sector  of  our  economy  in  order  to  preserve  the  experience  and 
expertise  that  has  been  developed  over  the  past  17  years. 


1138 

We  have  been  in  close  communication  with  the  staff  of  the  Joint 
Committee  on  Taxation,  the  staff  of  the  Treasury  Department,  and, 
as  a  result,  we  believe  that  amendments  to  the  original  2603  can 
be  developed  to  effectively  meet  the  transition  objectives  of  our  or- 
ganizations to  satisfy  the  legitimate  Federal  tax  policy  questions 
concerning  nonprofit  corporations  and  tax-exempt  organizations 
and  can,  over  time,  result  in  a  conversion  to  the  taxable  sector 
which  will  generate  significant  Federal  tax  revenues  over  a  5-year 
period. 

In  brief,  the  amendments  to  2603  would  allow  the  transfer,  at 
fair  market  value,  of  a  scholarship  funding  corporation's  student 
loan  assets  and  of  its  outstanding  debt,  both  taxable  and  tax-ex- 
empt, to  a  successor  taxable  corporation. 

Further,  the  scholarship  funding  corporation  would  be  permitted 
to  invest  any  of  its  net  assets  into  the  equity  stock  of  a  successor 
taxable  corporation,  but  providing  that  equity  interest  was  senior 
and  superior  to  any  subsequent  or  additional  equity  interest,  as  is- 
sued by  the  taxable  corporation. 

The  amendments  recognize  the  need  for  a  transition  provision  in 
this  area  providing  a  limited  exception  to  the  so-called  "excess  busi- 
ness holding"  ruling  that  is  applied  to  tax-exempt  private  founda- 
tions. This  exception  is  limited  in  both  time,  10  years,  and  scope 
of  business  activity  requiring  that  the  successor  corporation  con- 
tinue to  engage  to  at  least  50  percent  of  its  business  activities  in 
the  Federal  student  loan  programs. 

While  the  amendments  allow  the  transfer  of  outstanding  tfix-ex- 
empt  debt  to  a  taxable  corporation,  they  do  not  create  a  new  pri- 
vate use  as  prohibited  by  the  code.  The  use  of  tax-exempt  debt  to 
support  student  loans  has  been  part  of  the  code  since  1976.  Simi- 
larly, no  changes  to  the  statutory  or  regulatory  treatment  of  the 
tax-exempt  bonds  are  proposed  nor  are  there  changes  suggested 
that  would  change  the  private  activity  bond  caps  by  State.  In  this 
area,  consistent  with  the  tradition  of  transition  amendments,  both 
the  tax-exempt  corporation  and  the  successor  taxable  corporation 
would  waive  or  forgo  their  ability  to  issue  any  tax-exempt  debt  in 
the  future.  So  we  would  be  talking  about  just  the  currently  out- 
standing tax-exempt  debt  which  would  itself  pay  down  over  the 
stated  maturity  of  those  debts. 

In  closing,  I  want  to  thank  Mr.  Neal  and  Mr.  Moakley  for  their 
sponsorship  of  2603  and  thank  the  subcommittee  members  and 
staff  for  their  interest.  We  believe  that  we  have  achieved  that  most 
elusive  of  targets,  a  proposal  endorsed  by  virtually  the  entire  af- 
fected population  which  helps  to  attain  Federal  education  policy  ob- 
jectives and  which  contributes  to  Federal  tsix  revenues. 

I  would  be  pleased  to  answer  any  questions  at  the  conclusion  of 
the  panel. 

Mr.  KOPETSKI  [presiding].  Thank  you  for  your  testimony. 

[The  prepared  statement  and  attachment  follow:] 


1139 

statement  Of 

LAWRENCE  W.  O'TOOLE 

President  and  CEO 

NEW  ENGLAND  EDUCATION  LOAN  MARKETING  CORPORATION 

On  Behalf  Of 

NELLIE  MAE 

AND 

THE  EDUCATION  FINANCE  COUNCIL 

Submitted}  To 

THE  SUBCOMMITTEE  ON  SELECT  REVENUE  MEASURES 

United  States  House  of  Representatives 

September  IS,  1993 

I. 
Introduction 


My  name  is  Lawrence  W.  O'Toole.  I  am  President  and  Chief 
Executive  Officer  of  The  New  England  Education  Loan  Marketing 
Corporation,  also  known  as  "Nellie  Mae".  I  appreciate  this 
opportunity  to  follow  up  my  appearance  before  the  Subcommittee  on 
Select  Revenue  Measures  by  submitting  this  statement  on  behalf  of 
Nellie  Mae,  and  on  behalf  of  the  Education  Finance  Council,  whose 
membership  contains  sister  organizations  from  across  the 
country.!' 

We  hope  to  serve  as  constructive  participants  in  the 
development  of  federal  policy  relating  to  student  loan 
programs.  The  contours  of  the  federal  policy  in  the  student  loan 
area  have  changed  over  time  to  reflect  the  changing  needs  of  our 
nation's  students.  In  this  connection,  we  urge  the  Subcommittee 
to  support  tax  amendments  that  would  permit  scholarship  funding 
corporations  to  evolve,  as  the  federal  student  loan  programs 
evolve,  so  that  we  can  continue  to  accomplish  our  mission  to 
support  these  programs.  The  amendments  contained  in  H.R.  2603, 
introduced  by  Congressmen  Neal  and  Moakley,  represent  a  practical 
and  efficient  means  of  assuring  continued  private  sector  support 
for  the  programs  without  market  dislocation.  We  hope  the 
Subcommittee  will  support  an  amendment  of  this  type,  as  we  do. 

Scholarship  funding  corporations,  which  are  described  in 
Internal  Revenue  Code  section  150(d),  are  private,  nonprofit 
corporations  which  are  devoted  exclusively  to  providing  capital 
and  services  to  support  student  loans  made  under  the  Federal 
Family  Education  Loan  Programs.  We  serve  principally  as 
secondary  markets  for  these  loans.  Altogether  there  are 
approximately  21  nonprofit  scholarship  funding  corporations 
servicing  this  nation's  students  and  their  educational  lenders. 

We  believe  that  passage  of  an  amendment  reflecting  the 
concept  embodied  in  H.R.  2603  is  vital  to  accomplishing  our 
mission  of  assuring  that  college  students  receive  the  financial 


1/    Attached  as  an  appendix  hereto  is  a  brief  description  of 
the  membership  of  the  Education  Finance  Council. 


1140 


assistance  they  need.  This  financial  assistance  amounts  to  $15 
billion  in  new  student  loans  each  year,  which  will  be  funded 
through  the  current  Federal  Family  Education  Loan  Programs  and 
through  the  recently  enacted  Federal  Direct  Loan  Program. 

II. 

The  Role  of  Secondary  Markets  for  Student  Loans 

A.    Secondary  Markets  within  the  Framework  of  the  Privately 
Funded  Student  Loan  Programs. 

Since  the  enactment  of  the  Higher  Education  Act  of  1965, 
Congress  has  championed  affordable  financing  for  college 
education.  Until  the  enactment  of  the  Omnibus  Budget 
Reconciliation  Act  of  1993,  which  provides  for  a  graduated  phase- 
in  of  student  loans  funded  by  .  the  federal  government,  the 
hallmark  of  our  nation's  higher  education  policy  has  been  to 
encourage  private  lenders  to  provide  affordable  student  loans 
under  the  federal  guaranteed  student  loan  programs.  These 
programs  rely  on  the  voluntary  participation  of  private  sector 
organizations  to  provide  capital  to  originate  student  loans,  to 
provide  secondary  markets  offering  liquidity  to  lenders  and  to 
service  these  loans. 

To  further  its  policy  of  encouraging  low-cost  educational 
financing.  Congress  has  long  permitted  state  and  local 
governments  and  organizations  formed  on  their  behalf  to  issue 
tax-exempt  bonds  to  raise  capital  to  acquire  or  finance  student 
loan  notes.  However,  because  some  states  and  local  governments 
were  not  permitted  to  form  organizations  that  could  issue  tax- 
exempt  financing  for  student  loans,  under  a  special  provision 
enacted  by  Congress  in  1976  private,  nonprofit  corporations 
formed  under  state  law  and  whose  income  is  devoted  to  acquiring 
student  loans  are  permitted  to  issue  tax-exempt  bonds  to  finance 
the  purchase  of  those  loans. 

For  this  reason,  it  is  fair  to  say  that  nonprofit 
scholarship  funding  corporations  are  literally  creatures  of  the 
federal  student  loan  programs  and  the  tax  code.  In  order  for  the 
interest  paid  on  outstanding  tax-exempt  bonds  to  remain  exempt 
from  federal  income  tax,  we  are  required  to  operate  exclusively 
for  the  purpose  of  acquiring  student  loan  notes  made  under  the 
Higher  Education  Act  of  1965.  However,  because  of  the  many 
statutory  limitations  and  restrictions  on  the  use  of  tax-exempt 
financing,  scholarship  funding  corporations  often  use  both 
taxable  and  tax-exempt  sources  of  debt  to  finance  the  acquisition 
of  student  loan  portfolios.  As  nonprofit  corporations,  we  are 
prohibited  from  raising  capital  to  support  student  loan  programs 
through  the  equity  markets. 

Nonprofit  scholarship  funding  corporations  serve  an 
important  function  in  the  student  loan  financing  process,  by 
assuring  a  reliable  source  of  replacement  capital  for  originating 
lenders.  By  providing  liquidity  to  lenders,  the  lenders  are  able 
to  make  more  loans  to  student  borrowers.  The  importance  of  our 
role  is  recognized  by  Congress  and  the  Department  of  Education, 
which  treat  nonprofit  scholarship  funding  corporations  as 
"eligible  lenders"  under  the  federal  student  loan  programs. 

But  our  efforts  go  far  beyond  merely  acquiring  and  holding 
student  loans.  Although  our  primary  purpose  has  been  to  serve  as 
a  secondary  market  for  originating  lenders,  in  fact  we  provide  a 
broad  array  of  services  to  the  federal  student  loan  programs  and 
participants  in  those  programs.  These  include  originating 
student  loans  themselves,  consulting  with  and  advising  lenders 
and  loan  guarantors  regarding  underwriting,  servicing  and  default 
controls,  and  assisting  borrowers  with  repayment  matters.  We 
also  have  devised  sophisticated,  financial  systems  which  account 
for  and  monitor  outstanding  loans.  Our  workforce  is  experienced, 
well-trained  and  efficient. 


1141 


In  sum,  scholarship  funding  corporations  have  brought  much 
innovation  and  efficiency  to  the  federal  student  loan  programs. 
This  has  reduced  the  burdens  of  students,  lenders,  guarantors  and 
the  federal  government,  while  facilitating  the  delivery  of  $15 
billion  in  new  loans  to  almost  four  million  students  annually. 
Our  local  and  regional  activities  often  place  us  closest  to  the 
student  borrower  and  make  us  better  able  to  secure  repayment  of 
troubled  loans,  which  reduces  federal  costs.  As  a  consequence  of 
our  local  nature  and  our  systems  and  procedures,  we  are  able  to 
minimize  the  default  rate  on  the  student  loans  we  hold. 

The  Student  Loan  Reform  Act  of  1993,  adopted  as  part  of  the 
recently  enacted  Omnibus  Budget  Reconciliation  Act  of  1993, 
represents  a  substantial  shift  in  federal  policy  and  will, 
beginning  in  as  little  as  10  months,  create  a  new  federal  direct 
student  loan  program  to  compete  with  the  current  federal  student 
loan  programs. 

Our  foremost  concern  —  and  I  am  sure  the  concern  of 
Congress  as  well  —  is  that  all  eligible  students  have  access  to 
the  loan  capital  which  they  need  to  complete  their  educations. 
Our  organizations  have  played  and  can  continue  to  play 
substantial  roles  in  assuring  that  this  goal  is  accomplished. 

For  reasons  outlined  below,  there  will  continue  to  be  a 
great  need  for  private  capital  during  the  four  year  phase-in 
period  of  the  direct  loan  program.  The  concepts  of  H.R.  2603 
effectively  will  allow  scholarship  funding  corporations  to  have 
access  to  equity  capital  that  can  be  leveraged  for  the  benefit  of 
the  student  loan  programs  during  this  period.  Just  as  important, 
these  concepts  will  provide  scholarship  funding  corporations  the 
opportunity  to  remain  "going  concerns"  having  the  flexibility  to 
preserve  and  best  utilize  our  expertise  and  operational 
capabilities  to  support  the  new  federal  policy  and  the 
administration  of  the  federal  student  loan  programs  after  1997. 

B.    Anticipated  Consequences  of  Federal  Student  Loan  Program 
Changes . 

Under  the  recently  passed  Budget  Reconciliation  Act,  signed 
into  law  by  President  Clinton  on  August  10,  1993,  the  federal 
government  will  begin  making  direct  student  loans  in  the  1994-95 
academic  year.  Direct  loans  will  account  for  a  maximum  of  5 
percent  of  loan  volume  in  that  year,  increasing  to  maximums  of  40 
percent,  50  percent  and  60  percent  in  the  1995-96,  1996-97  and 
1997-98  academic  years,  respectively.-'  The  direct  loan  program 
adopted  by  Congress  will  rely  to  a  large  extent  on  colleges, 
universities  and  other  institutions  of  higher  education  to 
originate  loans  with  students.  In  addition,  however,  the  federal 
government  will  contract  with  third  parties  for  loan  origination, 
servicing  and  collection  activities.  Thus,  under  the  direct  loan 
program,  significant  private  sector  participation  will  be 
required  to  implement  and  administer  the  program.  As  noted 
above,  these  functions  are  many  of  the  same  now  successfully 
performed  by  nonprofit  scholarship  funding  corporations,  and  we 
believe  that  students  will  benefit  if  the  federal  government  has 
a  large  pool  of  competitors  for  these  service  contracts. 

With  the  introduction  of  the  direct  loan  program  and  the 
many  financial  cuts  made  in  the  current  programs,  it  is  expected 
that  a  number  of  lending  institutions  will  terminate  their 
participation  in  the  federal  programs."  This  will  occur  for 
several  reasons.  First,  with  the  advent  of  a  direct  loan 
program,  many  lenders  will  decide  to  devo'te  their  resource  to 


2/    It  is  not  clear  at  this  juncture  what  changes  to  the  mix  of 
privately  and  publicly  funded  student  loans  will  occur 
after  academic  year  1997-98. 


1142 


investments  other  than  the  guaranteed  student  loan  programs. 1/ 
Lenders  will  find  it  difficult  to  justify  increasing  their 
investment  in  a  program  that  may  be  phased  out  and  ultimately 
eliminated.  Moreover,  the  impetus  for  lenders  to  terminate 
participation  during  the  transition  period  will  increase  because 
of  the  significant  reduction  in  financial  incentives  for 
participation,  such  as  the  required  one-half  percent  origination 
fee  charged  lenders  and  required  default  risk-sharing  under  the 
new  policy.  Second,  there  will  be  increased  concern  among 
lenders  that  state  guaranty  agencies  will  experience  financial 
difficulty  because  of  the  potential  impact  of  reduced  loan 
volumes  on  the  revenues  and  solvency  levels  of  those  guarantors 
and  due  to  their  own  risk-sharing.  Third,  capital  markets  may  be 
more  reluctant  to  invest  in  the  bonds  and  notes  of  nonprofit 
scholarship  funding  corporations  during  the  transition 
period.l'  As  a  consequence  of  these  scenarios,  one  can  expect 
that  the  availability  of  private. sector  capital  could  decline 
significantly  during  the  comparison  period. 

In  summary,  the  phase-in  of  the  direct  loan  program, 
especially  when  coupled  with  reduced  financial  incentives  for 
private  lenders  and  state  guaranty  agencies,  virtually  assures 
that  only  focused,  high  volume  lenders  will  remain  to  provide 
private  loans  to  students.  The  overall  loss  of  private  capital 
to  sustain  student  loans  issued  by  the  private  sector  during  the 
transition  period  will  result  in  a  substantial  need  for  capital 
from  other  sources,  a  need  which  can  be  met  effectively  by 
scholarship  funding  corporations  aided  by  the  proposed 
amendments. 

C.     Impediments  Preventing  Scholarship  Funding  Corporations 
from  Raising  Needed  Capital. 

Many  nonprofit  scholarship  funding  corporations  are  ready 
and  willing  to  meet  the  additional  private  sector  capital  needs 
during  the  transition  phase.  Unfortunately,  however,  we  face 
both  legal  and  practical  constraints  affecting  our  ability  to 
raise  additional  capital  to  support  the  transition.  From  a  legal 
standpoint,  as  nonprofit  organizations  described  in  section 
501(c)(3)  of  the  Internal  Revenue  Code,  we  are  unable  to  raise 
equity  capital  from  private  investors.  All  of  our  equity  capital 
must  be  internally  generated  through  retained  earnings.  Because 
our  earnings-generated  equity  capital  builds  slowly,  it  cannot 
itself  be  expected  to  provide  sufficient  additional  capital  to 
meet  funding  needs. 

The  prohibition  against  equity  investment  also  serves  to 
limit  the  amount  of  debt  financing  which  may  be  accomplished  as  a 
result  of  the  insistence  of  the  financial  markets  on  reasonable 
debt-to-equity  ratios.  For  example,  Nellie  Mae's  own  ratio  of 
debt-to-equity  is  approximately  20:1;  thus,  increasing  debt 
levels  substantially  to  accommodate  large  new  loan  volumes  may  be 
difficult. 

Further,  the  default  risk-sharing  and  reduction  in  loan 
yield  provisions  of  the  Budget  Reconciliation  Act  will  make  debt 
financings  more  difficult  without  added  cushions  of  equity 
protection  for  bond  and  note  holders. 


3/    For  example,  already  one  of  the  nation's  largest  banks  has 
solicited  proposals  to  sell  its  student  loan  portfolio 
worth  approximately  $250  million. 

4/  As  a  consequence,  to  the  extent  they  do  in  fact  invest, 
investors  likely  will  require  higher  interest  rates  to 
account  for  this  perceived  greater  risk. 


1143 


Lastly,  potential  investors  will  look  to  the  single  purpose 
restriction  of  section  150(d)  with  concern  and  ask  the  question, 
"How  will  the  experience  and  expertise  of  these  organizations  be 
utilized  if  up  to  60  percent  of  the  student  loans  made  under 
federal  programs  are  converted  to  direct  federal  loans?".  The 
transition  relief  provided  by  H.R.  2603  effectively  responds  to 
that  question  by  providing  long  term  opportunities  to  utilize 
that  expertise,  while  facilitating  the  delivery  of  needed  private 
capital  during  the  transition  period. 

We  believe  our  nation's  students  will  continue  to  derive 
substantial  benefits  by  having  regional  organizations,  such  as 
ourselves,  compete  with  Sallie  Mae  for  secondary  market  purchases 
of  loan  portfolios  and  for  services  to  be  provided  to  the 
Department  of  Education  with  respect  to  direct  student  loans.  It 
is  virtually  impossible  to  believe  that  the  private  sector 
capital  required  during  the  transition  phase  could  be  raised  by 
start-up  corporations  nor  used  efficiently  by  such  corporations 
during  the  transition.  The  time  frame  is  simply  too  short  and 
the  investment  in  systems  and  personnel  too  great.  The  solution 
to  the  anticipated  capital  vacuum  must  address  the  need  to  avoid 
operational  redundancies  and  to  preserve  operational 
efficiencies.  Nonprofit  scholarship  funding  corporation  stand 
ready  to  assist  in  solving  the  dilemma  caused  by  this  anticipated 
capital  drain. 

III. 

The  Efficient  Transition  Solution  of  H.R.  2603 

The  basic  concept  of  H.R.  2603  offers  a  simple  yet 
efficient  blueprint  for  strengthening  the  ability  of  the  private 
sector  to  provide  capital  during  the  transition  phase  and,  at  the 
same  time,  contributing  to  an  increase  in  federal  tax  revenues. 

In  brief,  H.R.  2603  provides  three  substantive  elements  of 
transition  relief.  The  first  is  the  deletion  of  the  restriction 
that  the  nonprofit  organization  electing  the  transition  be 
engaged  exclusively  in  providing  a  secondary  market  for  the 
federal  student  loan  programs.  This  amendment  would  allow  the 
nonprofit  to  engage  in  activities  permitted  Internal  Revenue  Code 
section  501(c)(3)  organizations  generally.  Although  it  would 
retain  an  economic  investment  in  a  corporation  taking  over  its 
student  loan  secondary  market  role,  the  nonprofit  must  remain 
devoted  to  charitable,  educational  or  other  exempt  activities.-' 

The  second  element  would  permit  the  transfer  of  the 
scholarship  funding  corporation's  assets,  and  the  assumption  of 
its  outstanding  debt  (both  taxable  and  tax-exempt),  by  a 
successor  taxable  corporation  in  exchange  for  an  economic 
investment  in  the  successor.  This  element  would  permit  the 
scholarship  funding  corporation  to  make  a  transitional  investment 
of   its   net  assets   in  the  equity  stock  of  the  successor 


5/    Nellie  Mae,  through  its  sister  organization  Nellie  Mae, 
Inc.,  itself  a  section  501(c)(3)  organization,  already 
undertakes  traditional  charitable  activities.   It  has 
established  the  Nellie  Mae  Fund  for  Education  which,  over 
the  last  three  years,  has  provided  more  than  $2  million  in 
funding  for  over  76  educational  projects.   These  grants 
have  included  projects  designed  to  encourage  at-risk 
students  to  stay  in  school,  establish  goals,  and  build 
aspirations  that  provide  the  impetus  to  pursue  post- 
secondary  education.   In  addition,  Nellie  Mae,  Inc.  engages 
in  programs  designed  to  expand  access  to  higher  education 
financing  for  students  and  families  no  longer  eligible  for 
federal  programs  or  whose  financial  needs  exceed  the  limits 
of  federal  student  aid. 


1144 


corporation.  The  successor  would  be  able  to  increase  its  equity 
capital  by  the  issuance  of  further  equity  stock  interests,  as 
necessary  to  provide  acceptable  ratios  for  further  debt  issuance 
to  meet  student  loan  needs.  This  solution  will  solidify  the 
secondary  market  for  student  loan  notes  during  the  transition 
period,  provide  additional  capital  for  loan  origination,  and 
preserve  the  student  loan  origination  and  servicing  expertise 
that  will  aid  the  federal  student  loan  programs  after  the 
transition  is  complete.  Most  significantly,  these  goals  will  be 
accomplished  as  efficiently  as  possible,  without  the  inevitably 
wasted  lag  time  or  market  dislocation  that  would  occur  if 
scholarship  funding  corporations  were  forced  to  wind  down. 

Finally,  the  third  element  of  relief  is  the  ability  to 
structure  the  nonprofit's  economic  investment  in  the  successor  to 
contain  voting  rights,  without  causing  the  immediate  imposition 
of  the  tax  on  the  "excess  business  holdings"  applicable  to 
certain  nonprofits.  This  relief  will  afford  the  nonprofits  the 
ability  to  protect  their  investment. 

Specifically,  H.R.  2603  would  amend  section  150(d)  of  the 
Internal  Revenue  Code  to  permit  a  nonprofit  scholarship  funding 
corporation  to  elect  to  transfer  all  of  its  student  loan  notes  to 
a  for-profit  successor  corporation,  and  for  the  successor 
corporation  to  assume  (or  otherwise  arrange  to  repay)  the 
outstanding  tax-exempt  debt  of  the  nonprofit.  Under  the  bill, 
this  transaction,  in  and  of  itself,  would  not  adversely  affect 
the  income  tax  exemption  for  interest  paid  with  respect  to  the 
tax-exempt  debt.  No  new  "private  use"  exemption  for  tax-exempt 
bonds  would  be  created  by  this  transfer:  the  bonds  still  would  be 
devoted  to  the  acquisition  of  student  loan  notes  under  federal 
programs,  which  is  the  intent  underlying  Internal  Revenue  Code 
section  150(d);  moreover,  the  nonprofit  sector  would  retain  the 
benefit  of  the  value  of  the  net  assets  transferred  through  its 
economic  interest  in  the  successor  corporation. 

In  essence,  the  bill  would  allow  a  scholarship  funding 
corporation  to  convert  to  a  for-profit  corporation  and  maintain 
its  operational  efficiency  by  transferring  all  of  its  functions 
as  a  "going  concern."  By  allowing  a  full  and  complete  "going 
concern"  transition,  H.R.  2603  provides  scholarship  funding 
corporations  the  ability  to  immediately  seek  additional  capital 
to  support  the  direct  loan  phase-in  period  and  to  preserve  their 
capabilities  as  independent  service  contractors  to  the  Department 
of  Education  with  respect  to  direct  loans.-' 

To  meet  the  requirement  of  the  election,  the  nonprofit  must 
remain  an  organization  described  in  section  501(c)(3)  of  the 
Internal  Revenue  Code  after  the  transfer.  Thus,  the  nonprofit 
would  not  continue  to  be  limited  to  investing  only  in  student 
loan  notes  issued  under  the  Higher  Education  Act  of  1965,  but 
would  be  able  to  undertake  the  broader  activities  of  an 
organization  described  in  section  501(c)(3),  such  as  charitable 
or  other  educational  activities.  The  economic  return  received  by 
the  nonprofits  from  its  investment  in  the  successor  would  be  a 
primary  funding  source  for  the  nonprofit's  exempt  activities. 

We  recognize  that  an  important  aspect  of  this  proposal  is 
ensuring  that  the  investment  made  by  the  nonprofits  in  the 
successor  corporation  is  protected,  both  from  an  economic  and 


6/    The  concern  has  been  raised  that,  after  the  transition,  th 
scholarship  funding  corporations  may  not  remain  as 
participants  in  the  federal  student  loan  programs. 
Although  we  believe  this  concern  is  unwarranted,  we  would 
not  object  to  reasonable  statutory  rules  that  require  the 
successor  corporations  to  serve  the  federal  student  loan 
programs;  after  all,  this  is  our  mission. 


1145 


corporate  governance  standpoint.  We  continue  to  discuss  these 
aspects  with  the  staff  of  the  Subcommittee,  representatives  of 
the  Treasury  Department  and  the  staff  of  the  Joint  Committee  on 
Taxation.  We  believe  the  outcome  of  these  discussions  will  be  an 
appropriate  resolution  of  these  concerns  that  does  not  place 
unnecessary  burdens  on  the  successor  corporation's  ability  to 
raise  additional  capital  to  support  private  financing  of  student 
loans.!/ 

Solely  as  a  result  of  the  transfer  of  assets  and 
liabilities  to  the  for-profit  corporation  in  exchange  for  the 
economic  interest  in  that  corporation,  it  is  likely  that  the 
nonprofit  would  become  subject  to  one  of  the  excise  taxes  imposed 
on  section  501(c)(3)  organizations  that  are  classified  as  private 
foundations  (i.e.,  those  section  501(c)(3)  organizations  that  do 
not  meet  certain  thresholds  of  financial  support  from  the 
public).  Under  section  4943  of.  the  Internal  Revenue  Code, 
private  foundations  that  have  "excess  business  holdings"  are 
subject  to  an  initial  tax  equal  to  5  percent  of  the  value  of  such 
holdings  and  an  extremely  onerous  additional  tax  if  the  situation 
persists. 

In  view  of  the  close  relationship  between  the  secondary 
market  activities  of  the  successor  corporation  after  the  transfer 
and  the  secondary  market  activities  of  the  nonprofit  scholarship 
funding  corporation  prior  to  the  transfer,  H.R.  2603  provides 
limited  relief  from  the  tax  on  excess  business  holdings 
attributable  to  the  nonprofit's  investment  in  the  successor 
corporation.  Under  the  bill,  the  excise  tax  under  Code  section 
4943  for  the  "excess  business  holdings"  of  a  private  foundation 
will  not  apply  with  respect  to  the  nonprofit's  stockholdings  in 
the  successor  corporation,  but  only  so  long  as  more  than  50 
percent  of  the  gross  income  of  the  successor  corporation  is 
derived  from,  or  more  than  50  percent  of  the  value  of  the  assets 
of  the  successor  corporation  consists  of,  student  loan  notes. 

This  transition  relief  is  narrowly  crafted.  It  would  apply 
only  when  the  successor  corporation  is  primarily  servicing  the 
same  function  after  the  transfer  as  the  nonprofit  served  prior  to 
the  transfer.  Significantly,  it  avoids  unwanted  competition 
between  the  nonprofit  and  the  successor  for  equity  investors  in 
the  successor  corporation's  stock  during  the  transition,  which 
would  potentially  drain  capital  from  support  of  the  federal 
student  loan  programs.   This  is  an  important  consideration. 

This  limited  exception  to  the  excess  business  holdings  rule 
of  section  4943  is  appropriate  for  two  reasons.  First,  we 
believe  that,  from  a  corporate  governance  standpoint,  it  is 
necessary  for  a  nonprofit  which  is  making  a  substantial 
investment  in  the  successor  to  have  a  voice  in  the  direction  of 
that  corporation  so  it  may  protect  its  investment.  Although  the 
nonprofit  should  not  be  involved  in  the  everyday  business 
decisions  of  the  successor,  it  should  be  able  to  express  its 
approval  or  disapproval  of  major  corporate  transactions  or  other 
significant  corporate  matters  commensurate  with  its  interest  in 
the  successor.  Second,  the  exception  is  necessitated  by  a  change 
in  federal  policy  as  it  affects  an  organization  devoted  to 
serving  the  prior  federal  policy.  In  contrast  with  many  other 
statutory  exceptions,  this  exception  in  fact  would  facilitate  the 
implementation  of  the  new  federal  policy. 


7/    For  example,  these  objectives  perhaps  could  be  accomplished 
by  structuring  the  investment  in  the  successor  corporation 
as  the  most  senior  equity  interest  in  the  successor 
corporation,  with  features  that  would  permit  the  investment 
to  participate  in  the  appreciation  in  value  of  the 
corporation  yet  protect  the  investment  from  downside 
potential. 


1146 


Once  a  nonprofit  scholarship  funding  corporation  makes  the 
election,  we  believe  that  neither  the  nonprofit  nor  the  successor 
corporation  should  be  allowed  to  issue  additional  tax-exempt 
debt.  The  proceeds  of  tax-exempt  debt  outstanding  on  the  date  of 
the  transfer,  in  the  hands  of  the  successor  corporation,  will 
continue  to  support  the  student  loan  programs  until  that  debt  is 
retired.  Moreover,  any  earnings  benefit  derived  by  the  successor 
corporation  from  the  tax-exempt  debt  will  be  fully  subject  to 
federal  income  tax. 

IV. 

Conclusion 

We  urge  the  Subcommittee  to  support  the  concept  contained 
in  H.R.  2603.  This  proposal  offers  a  cost-effective  means  of 
bolstering  the  capital  base  of  the,  secondary  student  loan  market 
during  the  transition  period  and  of  assuring  that  the  expertise 
and  workforce  of  the  scholarship  funding  corporations  are 
maintained  to  provide  services  in  furtherance  of  the  federal 
student  loan  programs.  In  short,  the  proposal  would  permit 
scholarship  funding  corporations  to  evolve  with  the  federal 
student  policy,  serve  the  recognized  needs  for  capital  and 
services  provided  by  the  private  sector  and,  in  this  connection, 
compete  with  Sallie  Mae  to  the  benefit  of  the  federal  government 
and  our  nation's  students. 

The  adoption  of  an  amendment  of  this  type  will,  we  believe, 
also  have  the  effect  of  increasing  federal  tax  revenues  by 
transferring  this  student  loan  activity  from  the  tax-exempt  to 
the  taxable  sector.  We  look  forward  to  working  with  the 
Subcommittee  to  refine  this  proposal  so  that  these  goals  can  be 
accomplished. 


1147 


The  Edncation  Finance  Coundi.  Inc. 

The  Education  Finance  Council  ("EFC")  is  a  noi-for-profit  association  organized  to 
promote  ttie  conunon  interests  of  tax-exempt  education  loan  secondary  market  organizanons 
whose  mission  is  to  maimain  and  expand  student  access  to  higher  education  oppominities  by 
ensunng  the  availability  of  tax-exempt  funding  for  education  loans  and  fulfilling  the  resource 
needs  of  students  and  families  pursuing  post-secondary  education.   EFC.  while  only  formed 
in  December.  1992.  cunemly  represents  the  23  nonprofit  state-based  secondary  markets 
which  are  listed  below. 

As  of  December  31.  1992,  nonprofit  state  secondary  markets  held  at  least  SI2  billion. 
or  approximately  20%.  of  all  outstanding  FFEL  Program  Loans. 

Arkansas  Studem  Loan  Authority 

California  Higher  Education  Loan  Authority.  Inc. 

Central  Texas  Higher  Education  Authority.  Inc. 

CitiState  Advisors  on  behalf  of  LA  Public  Facilities  Authority 

Colorado  Student  Obligation  Bond  Authority 

Greater  East  Texas  Higher  Education  Authority 

Illinois  Student  Assistance  Commission/IDAPP 

Iowa  Student  Loan  Liquidity  Corporation 

Maine  EdtuMtional  Loan  Marketing  Corporation 

Michigan  Higher  Education  Student  Loan  Authority 

Mississippi  Higher  Education  Assistarxe  Corporation 

Missouri  Higher  Ediuxuion  Loan  Authority 

Montana  Higher  Education  Student  Assistance  Corporation 

Nebraska  Higher  Education  Loan  Program.  Inc. 

North  Texas  Higher  Education  Authority.  Inc. 

New  Jersey  Higher  Education  Assistance  Authority 

Panhandle  Plains  Higher  Education  Authority 

Pennsylvania  Higher  Education  Assistance  Agency 

Southwest  Texas  Higher  Education  Authority,  Inc. 

The  Studem  Loan  Funding  Corporation 

Utah  Higher  Education  Assistance  Authority 

Vermont  Student  Assistance  Corporation 
Volunteer  State  Student  Funding  Corporation 


1148 

Mr.  KOPETSKI.  I  want  to  remind  the  panelists  that  we  have  seven 
panels  today.  I  know  some  of  you  probably  have  airplanes  at  5 
o'clock  that  you  would  want  to  catch  after  your  testimony.  If  we 
could  adhere  as  closely  as  possible  to  the  5-minute  rule,  we  will  all 
make  our  airplanes  and  other  places  that  we  have  to  be  later  this 
afternoon. 

With  that,  we  have  Mr.  Uvena.  Welcome. 

STATEMENT  OF  FRANK  UVENA,  SENIOR  VICE  PRESIDENT, 
LAW  AND  CORPORATE  STAFFS,  R.R.  DONNELLEY  &  SONS 
CO.,  CfflCAGO,  ILL. 

Mr.  Uvena.  I  am  Frank  Uvena,  senior  vice  president,  law  and 
corporate  staffs  of  R.R.  Donnelley  &  Sons  Co.  As  such,  I  have  held 
responsibility  for  employee  benefits,  and  for  human  resources.  I  am 
not  a  tax  expert. 

R.R.  Donnelley  is  a  leader  in  managing,  reproducing  and  distrib- 
uting print  and  digital  information  services,  worldwide.  We  are  129 
years  old.  Our  total  current  employment  is  32,000,  mostly  in  the 
United  States.  More  than  11,500  of  our  employees  have  been  with 
us  for  more  than  10  years. 

I  appreciate  the  opportunity  to  appear  before  you  today  to  offer 
my  company's  view  on  an  issue  of  importance  to  us.  I  would  also 
like  to  thank  Congressman  Reynolds  for  helping  us  bring  this  mat- 
ter before  you. 

I  am  here  to  propose  that  the  committee  consider  the  reinstate- 
ment of  a  tax  credit  that  was  in  effect  until  1987.  That  provision 
allowed  employers  a  tax  credit  of  three-quarters  of  1  percent  of  the 
compensation  due  to  employees  provided  that  the  entire  amount 
was  contributed  to  an  employee  stock  ownership  plan  to  purchase 
stock  to  be  distributed  only  to  employees.  This  particular  variety 
was  known  as  a  PAYSOP.  The  tax  credit  was  initiated  by  Congress 
to  encourage  widespread  stock  ownership  by  employees  of  Amer- 
ican companies.  Our  company  adopted  this  plan  in  1981.  Our  plan 
was  designed  for  the  broadest  possible  employee  participation.  We 
made  it  available  to  everyone  with  at  least  1  year's  full  service,  and 
we  paid  all  costs  of  administration  to  ensure  that  the  entire  credit 
would  be  used  only  to  acquire  stock.  The  plan  was  so  popular  that 
by  1987  75  percent  of  our  full-time  employees  in  the  United  States 
were  participating  and  held  over  1,750,000  shares  they  had  re- 
ceived through  the  PAYSOP. 

It  is  clear  the  PAYSOP  tax  credit,  as  it  existed  in  1986,  was  an 
important  contribution  to  employee  morale,  an  effective  way  of  en- 
hancing commitment,  of  encouraging  employees  to  feel  a  relation- 
ship beyond  employee-employer,  to  feel  a  real  sense  of  ownership 
in  the  company. 

I  believe  this  was  Congress'  intent  in  enacting  the  program  in 
the  first  place.  It  clearly  worked  at  Donnelley.  It  worked  because 
it  was  available  to  all  employees.  It  worked  because  it  was  simple 
in  operation.  It  worked  because  it  was  easy  to  understand,  and, 
most  important,  it  worked  because  it  benefited  employees  directly. 
I  know  our  employees  were  surprised  and  disappointed  by  the  Gov- 
ernment's decision  to  drop  the  program  after  1986.  We  discon- 
tinued further  funding  of  the  program  in  1987  when  tax  credits 
were  no  longer  available.  This  decision  underscores  a  fundamental 


1149 

point  which  I  would  hke  to  emphasize.  We  have  never  considered 
the  PAYSOP  plans  as  in  way  a  substitute  for  retirement  benefits 
or  for  other  employee  benefits  generally. 

If  the  Congress  sees  fit  to  reinstate  the  program,  we  will  partici- 
pate enthusiastically,  but  we  have  no  intention  of  using  it  to  re- 
place any  employee  benefits  now  in  place.  The  change  will  benefit 
our  employees  only.  It  will  not  add  a  penny  to  Donnelley's  earn- 
ings. 

Let  me  now  address  the  PAYSOP  issue  in  a  somewhat  broader 
context.  All  of  us  know  that  American  businesses  are  participants 
in  a  highly  competitive  global  economy.  It  is  essential  all  employees 
be  empowered  to  think  and  act  much  like  business  owners.  We  feel 
strongly  stock  ownership  can  help  to  foster  such  an  attitude  and 
reward  such  work  and  sacrifice. 

We  all  know  in  an  effort  to  remain  competitive  and  productive 
in  a  global  marketplace,  American  businesses  have  sharply  reduced 
the  number  of  middle  managers  and,  indeed,  the  number  of  core 
employees  generally.  This  makes  it  all  the  more  important  all  em- 
ployees see  themselves  as  partners  in  the  business. 

Let  me  summarize.  The  overall  goal  of  our  proposal  is  to  put 
stock  into  the  hands  of  all  employees.  This  will  help  foster  an  atti- 
tude of  ownership,  a  long-term  view  of  employment  and  its  bene- 
fits, and  therefore,  ultimately,  higher  productivity. 

Past  experience  demonstrates  that  the  PAYSOP  was  an  effective 
mechanism  for  sharply  increasing  stock  ownership  by  all  employ- 
ees. It  was  easy  to  understand,  simple  to  administer,  and  all  its 
benefits  flowed  directly  to  the  employees. 

We  ask  for  reinstatement  of  the  PAYSOP  tax  credit  which  ex- 
isted prior  to  the  Tax  Reform  Act  of  1986.  Your  staff  will  shortly 
provide  an  estimate  of  the  revenue  impact  of  this  proposal.  Al- 
though clearly  preferring  and  strongly  recommending  reinstate- 
ment of  the  credit  as  it  existed  in  1986,  we  do  suggest  several  other 
options  the  committee  may  want  to  consider.  They  are  set  forth  in 
my  written  statement. 

In  conclusion,  what  we  advance  here  today  will  allow  our  Gov- 
ernment to  reinstate  a  simple,  proven  and  effective  mechanism  for 
substantially  increasing  stock  ownership  among  the  working  people 
of  America.  This  in  turn  will  make  a  major  contribution  to  Ameri- 
ca's economic  prospects  for  the  future. 

Thank  you  for  your  time  and  attention. 

Mr,  KOPETSKI.  Thank  you  very  much  for  your  testimony. 

[The  prepared  statement  follows:] 


77-130  0 -94 -5 


1150 


TESTIMONY  OF  FRANK  J.  UVENA 
R.R.  DONNELLEY  &  SONS  CO. 

Good  Morning  Mr.  Chairman,  Members  of  the  Committee  - 

My  name  is  Frank  Uvena.   1  eua  Senior  Vice  President,  Law  and 
Corporate  Staffs,  of  RR  Donnelley  &  Sons  Company.   As  such,  I 
have  held  responsibility  for  employee  benefits,  for  human 
resources  and  for  corporate  staff  functions  which  emphasize  high 
employee  involvement  and  quality  management. 

RR  Donnelley  is  a  leader  in  managing,  reproducing  and 
distributing  print  and  digital  information  services  world  wide. 
As  the  world's  largest  commercial  printer,  we  produce  catalogs, 
newspaper  advertising  inserts,  magazines,  books,  directories, 
financial  printing  and  computer  documentation.   Our  total  current 
employment  is  about  32,000,  with  most  of  our  employees  in  the 
United  States. 

I  very  much  appreciate  the  opportunity  to  appear  before  you 
today  to  offer  my  company's  view  on  an  issue  of  importance  to  us. 

I  am  here  to  propose  that  the  Committee  consider  the 
reinstatement  of  a  tax  credit  that  was  in  effect  until  1987. 
That  provision  allowed  employers  a  tax  credit  of  0.75%  of  the 
compensation  due  to  employees,  provided  that  the  entire  amount 
was  contributed  to  an  Employee  Stock  Ownership  Plan,  to  purchase 
stock  to  be  distributed  only  to  employees.   This  particular 
variety  was  known  as  a  PAYSOP.   The  tax  credit  was  initiated  in 
1981  to  encourage  wide-spread  stock  ownership  by  the  employees  of 
all  types  of  American  companies. 

My  company  adopted  such  a  plan  in  1981.   From  the  beginning, 
our  plan  was  designed  for  the  broadest  possible  employee 
participation.   We  made  it  available  to  everyone  with  at  least 
one  full  year  of  service,  and  we  paid  all  costs  of  administration 
to  ensure  that  the  entire  credit  would  be  used  only  to  acquire 
stock.   The  plan  was  so  popular  that  by  1987  some  75%  of  all  of 
our  full  time  employees  in  the  United  States  were  participating. 
At  that  time  our  employees  held  1,752,220  shares  they  had 
received  through  the  PAYSOP. 

Our  employees  understood  and  appreciated  the  stock  ownership 
rights  obtained  under  the  program.   For  generations  at  Donnelley, 
members  of  senior  management  have  met  with  all  employees 
regularly  to  discuss  the  state  of  the  company  and  to  receive 
employee  questions,  comments  and  criticisms.   As  one  of  the 
Donnelley  executives  regularly  involved  in  these  meetings,  I  know 
that  employees  frequently  asked  questions  about  their  benefits 
and  rights  under  the  PAYSOP  plan.   I  know  it  gave  them  an 
important  feeling  of  ownership,  of  partnership  in  their  company. 
I  can  also  testify  they  were  sujrprised,  dismayed  and  disappointed 
when  this  benefit  was  no  longer  available  after  1986.   They 
simply  never  understood  why  it  was  discontinued  by  the 
government . 

Based  on  our  objective  statistics  on  employee  participation, 
and  the  personal  experience  which  I  have  just  described,  which 
was  shared  by  my  colleagues  in  the  senior  management  of  the 
company,  it  was  clear  the  PAYSOP  tax  credit  as  it  existed  in  1986 
was  an  important  contribution  to  employee  morale  and  an  effective 
way  of  enhancing  commitment,  of  encouraging  employees  to  feel  a 
relationship  beyond  employee-employer,  to  feel  a  real  sense  of 
ownership  in  their  company.   I  believe  this  was  Congress's  intent 
in  enacting  the  program  in  the  first  place.   It  clearly  worked  at 
Donnelley.   It  worked  because  it  was  available  to  all  employees, 
simple  in  operation,  easy  to  understand  and,  most  important, 
benefitted  employees  directly. 

We  discontinued  further  funding  of  the  program  in  1987  when 
tax  credits  were  no  longer  available.   As  I  mentioned,  at  that 
time  approximately  75%  of  our  employees  in  the  United  States  were 
participants  in  the  plan  and  thereby  Donnelley  stock  holders. 

One  might  well  ask  why  Donnelley  withdrew  from  the  program 
entirely  at  that  time,  when,  as  you  know,  a  number  of  provisions 
permitting  Employee  Stock  Ownership  Plans  remained  in  the  law, 
and  are  indeed  still  there  today?  This  is  a  fair  question.   In 
our  view,  the  remaining  provisions  governing  ESOPs  are  intended 
to  serve  purposes  quite  different  from  that  of  the  plan  in  which 
we  participated.   Some  such  provisions  were  intended  to  apply 
primarily  to  closely  held  corporations  and  their  stockholders. 
Other  provisions  allowing  for  an  effective  deduction  of  ESOP  loan 


1151 


payments  helped  facilitate  stock  buyouts  on  a  highly  leveraged 
basis.   Finally,  some  companies  used  ESOP  incentives  to  radically 
change  their  benefit  structure  for  employees,  so  as  to  feature  an 
ESOP  as  the  predominant  benefit  available. 

In  short,  as  the  law  currently  stands,  the  ESOP  tax 
incentives  are  designed  to  further  the  business  purposes  of 
certain  corporate  entities  and  their  stockholders  by  providing 
favorable  means  of  transferring  shares,  obtaining  less  costly 
financing  or  a  less  expensive  package  of  benefits. 

We  of  course  have  examined  and  carefully  considered  these 
possibilities.   The  first  two  clearly  did  not  apply  to  us.   with 
respect  to  benefit  packages,  we  already  had  what  we  regarded  as 
an  extraordinarily  attractive  benefit  package,  that  was 
understood  by  and  effective  for,  our  employees  generally.   We  saw 
no  reason  to  change  it. 

This  decision  underscored  a  fundamental  point  which  I  should 
like  to  emphasize.   We  never  considered  the  PAYSOP  plans  as  in 
any  way  a  substitute  for  retirement  benefits  or  for  other 
employees  benefits  generally,  and  we  do  not  do  so  now.   If  the 
Congress  sees  fit  to  reinstate  the  program,  we  will  participate 
enthusiastically,  but  we  have  no  intention  of  using  it  to  replace 
any  employee  benefits  now  in  place.   The  change  will  benefit  our 
employees  only;  it  will  not  add  a  penny  to  Donnelley's  earnings. 

I  should  now  like  to  take  a  moment  to  place  the  PAYSOP  issue 
in  a  somewhat  broader  context.   All  of  us  know  that  we  are 
participants  in  a  highly  competitive  global  economy.   If 
individual  American  companies  and  American  industry  generally  are 
to  remain  competitive  in  the  world  marketplace,  we  must 
anticipate  customers'  needs,  respond  to  those  needs  more  quickly, 
deliver  the  quality  the  customers  demand,  and  do  all  of  this  at  a 
very  competitive  price.   We  feel  that  this  sort  of  response,  with 
the  needed  level  of  innovation  and  quality  control,  is 
impossible,  unless  we  empower  our  hourly  employees  to  participate 
fully  in  the  operation  of  the  company.   This  revolutionary  new 
corporate  culture  often  requires  our  employees  to  think  and  act 
and  make  sacrifices  much  like  those  of  a  small  business  owner. 
We  feel  strongly  that  to  foster  such  an  attitude  and  to  reward 
such  work  and  sacrifice,  all  employees  should  actually  be  owners, 
and  participate  in  the  long-term  benefits  of  stock  ownership. 

You  gentlemen  all  know  that  in  an  effort  to  remain 
competitive  and  productive  in  a  global  marketplace,  American 
business  has  sharply  reduced  the  number  of  middle  managers  and, 
indeed,  the  number  of  core  employees  generally.   The  wide-spread 
anxiety  and  pain  resulting  from  this  unavoidable  process  make  it 
all  the  more  important  that  our  employees  generally  see 
themselves  as  partners  in  the  business,  feel  that  they  have  a 
real  stake  beyond,  although  certainly  not  instead  of,  the  regular 
pay  check.   At  this  point  you  might  ask:  This  is  very  persuasive. 
It  sounds  like  an  excellent  program.   So,  why  don't  you  just  go 
ahead  and  do  it?  Why  are  you  here  talking  to  us?  To  answer  that 
question,  I  must  again  emphasize  the  rigorous  competitiveness  of 
the  environment  in  which  we  operate.   Our  wage  levels  rank  near 
the  top  of  our  industry  and  compare  very  favorably  to  industry 
generally.   Our  employee  benefits,  such  as  insurance,  healthcare, 
and  a  fully  funded  retirement  plan,  are,  we  think,  generous.   In 
view  of  the  very  narrow  profit  margins  under  which  we  must 
operate  in  these  difficult  days,  we  cannot  afford  to  do  more. 

Most  companies  have  gone  through  or  are  going  through 
dramatic  and  difficult  changes  to  reduce  their  costs  and  remain 
competitive.   Adding  additional  costs  is  simply  not  an  option  for 
such  companies  in  today's  economic  environment. 

Many  employees  are  struggling  to  maintain  their  standard  of 
living.   They  could  not  easily  accept  a  conversion  of  their 
current  cash  compensation  to  mostly  cash  with  some  employers' 
stock.   It  follows  that  in  the  current  environment,  broadened 
employee  stock  ownership  will  not  occur  without  significant 
support  by  the  United  States  government. 

Let  me  summarize. 
The  purpose; 

The  overall  goal  is  to  put  stock  into  the  hands  of  all 
employees.   This  will  help  to  foster  an  attitude  of  ownership,  a 


1152 


long  term  view  of  employment  and  its  benefits,  and  therefore, 
ultimately,  higher  productivity. 

Past  experience  demonstrates  that  the  PAYSOP  was  an 
effective  mechanism  for  sharply  increasing  stock  ownership  by 
rank  and  file  employees.   It  was  easy  to  understand,  simple  to 
administer,  and  all  its  benefits  flowed  directly  to  the 
employees. 

ESOP  provisions  in  the  current  Internal  Revenue  Code  focus 
on  more  narrow,  targeted  groups,  such  as  closely  held 
corporations,  LBO's  and  corporations  needing  to  restructure  their 
benefits  plans.   As  a  result,  ESOP,  as  it  appears  in  the  current 
law,  is  really  oriented  to  favor  the  corporate  entity  or 
investment  community.   This  is  not  our  purpose. 
Our  Proposal 
We  ask  for  reinstatement  of  the  0.75%  PAYSOP  tax  credit 
which  existed  prior  to  the  TAx  Reform  Act  of  1986.   It  was 
formerly  codified  as  Sec.  44G  of  the  Internal  Revenue  Code  of 
1954. 

Some  revenue  impact  from  such  a  program  is  inescapable.   It 
is  our  understanding  that  the  staff  of  this  Committee  hopes  to 
have  available  an  estimate  of  the  amount  of  this  impact  on  or 
about  September  14th,  so  it  is  pointless  for  me  to  speculate  at 
this  juncture  as  to  what  those  numbers  might  be.   However,  in 
order  to  limit  the  revenue  impact  of  this  proposal  RR  Donnelley, 
although  clearly  preferring  and  strongly  recommending 
reinstatement  of  the  credit  as  it  existed  in  1986,  is  suggesting 
several  options  the  Committee  may  want  to  consider.   All  of  them 
will  achieve  the  primary  goal,  the  increase  of  stock  ownership  by 
lower  compensated  employees. 

Option  One  -  Limit  the  contribution  and  tax  credit  to 
$450  per  employee.   This  figure  is  derived  by  limiting 
the  contribution  to  0.75%  of  compensation  up  to  a 
maximum  of  $60,000. 

Option  Two  -  Limit  the  credit  to  the  compensation  only 
of  "non-highly  compensated"  employees.   The  definition 
of  such  employees  would  be  that  presently  set  out  in 
the  Internal  Revenue  Code. 

Option  Three  -  Provide  the  0.75%  tax  credit,  but 
require  a  distribution  of  stock  from  the  plan  to  each 
employee  within  four  years  of  the  contribution  by  the 
employer.   This  would  trigger  taxation  to  the  employee 
on  the  value  of  the  stock  as  of  the  date  of 
distribution,  and  therefore  reduce  the  tax  loss  to  the 
government . 

Option  Four  -  Reduce  the  tax  credit  to  0.5%  of 
compensation,  the  provision  which  was  in  effect  for  the 
tax  years  1983  and  1984.   To  limit  the  revenue  impact 
further.  Option  Four  could  be  combined  with  Option  One 
or  Two  and  Three. 
We  believe  that  Options  One  and  Two  are  essentially  inter- 
changeable and  are  clearly  preferable  to  Options  Three  and  Four. 
They  provide  different  ways  to  approach  the  same  issue.   The 
third  option  is  least  preferred  because  it  would  have  the  effect 
of  reducing  the  amount  of  stock  held  by  employees  in  the  long 
term. 

Conclusion 
The  proposals  advanced  here  will  allow  our  government  to 
reinstate  a  simple,  proven  and  effective  mechanism  for 
substantially  increasing  stock  ownership  among  the  working  people 
of  America.   When  combined  with  sweeping  internal  corporate 
changes,  variously  termed  high  employee  involvement  or  employee 
empowerment,  the  proposal  will  significantly  improve 
productivity.   This,  in  turn,  will  make  a  major  contribution  to 
America's  economic  prospects  for  the  future. 


1153 

Mr.  KOPETSKI.  Mr.  Romeo. 

STATEMENT  OF  RICHARD  P.  ROMEO,  CHAIRMAN,  TAX  COM- 
MITTEE, AMERICAN  FINANCIAL  SERVICES  ASSOCIATION, 
AND  VICE  PRESIDENT  AND  GENERAL  TAX  COUNSEL, 
AMERICAN  EXPRESS  TRAVEL  RELATED  SERVICES  CO.,  INC., 
NEW  YORK,  N.Y. 

Mr.  Romeo.  Thank  you,  Mr.  Chairman  and  members  of  the  sub- 
committee. I  am  Richard  P.  Romeo,  vice  president,  general  tax 
counsel  of  American  Express  Travel  Related  Services  Co.,  Inc.,  in 
New  York. 

Today,  I  am  testifying  on  behalf  of  the  American  Financial  Serv- 
ices Association  (AFSA),  which  is  the  Nation's  largest  trade  asso- 
ciation representing  nonbank  providers  of  consumer  financial  serv- 
ices. 

We  have  a  more  detailed  written  statement  that  we  would  like 
to  submit  for  the  record. 

Today,  we  appreciate  the  opportunity  to  testify  in  support  of  a 
proposal  to  clarify  when  a  debt  will  be  considered  worthless  for  tax 
purposes  so  that  a  deduction  may  be  obtained.  AFSA  urges  your 
support  for  this  proposal  since  it  would  achieve  substantial  sim- 
plification of  current  law,  would  assure  that  taxpayers  in  similar 
businesses  will  be  treated  similarly  for  tax  purposes,  and  would 
have  little  or  no  adverse  revenue  impact. 

Under  current  law,  deductions  for  bad  debts  are  allowed  only  in 
the  year  in  which  the  debts  become  worthless.  For  companies  like 
AFSA  members,  which  typically  have  a  high  volume  of  relatively 
small  loans  and  receivables,  proving  worthlessness  on  a  loan-by- 
loan  basis  is  a  cumbersome  and  time  consuming,  if  not  impossible, 
task. 

For  regulated  financial  institutions  such  as  banks  and  thrifts, 
Treasury  regulations  now  afford  a  conclusive  presumption  allowing 
conformity  of  financial  accounting  and  tax  treatment  for  worthless 
debts.  No  such  standard  applies  to  unregulated  creditors  such  as 
AFSA  members,  even  though  they  compete  with  regulated  lenders 
and  hold  similar  loans  and  receivables. 

In  connection  with  the  repeal  of  the  reserve  method  by  the  Tax 
Reform  Act  of  1986,  Congress  directed  the  Treasury  Department  to 
study  and  issue  a  report  on  bad  debt  deductions.  In  its  report, 
Treasury  acknowledged  the  fundamental  similarities  between 
banks  and  nonbank  financial  services  companies,  and  the  problems 
that  nonbanks  face  without  a  similar  bad  debt  standard. 

One  approach  considered  by  Treasury  for  nonbank  creditors 
would  be  to  determine  worthlessness  for  tax  purposes  by  reference 
to  the  standards  set  by  bank  regulatory  authorities.  Treasury's 
evaluation  of  this  approach  was  largely  favorable,  and  it  was  deter- 
mined to  involve  an  insignificant  revenue  effect.  However,  Treasury 
concluded  that  extending  a  book- tax  conformity  rule  to  creditors 
other  than  regulated  lenders  should  be  introduced  with  congres- 
sional approval  rather  than  by  unilateral  regulatory  action. 

It  is  important  to  note  that  the  proposed  rule  would  not  impose 
a  book-tax  conformity  rule  for  all  bad  debt  deductions.  Rather,  it 
would  apply  only  with  respect  to  those  types  of  debts  for  which 
bank  regulators  prescribe  specific,  objective  rules  that  can  be  read- 


1154 

ily  applied  by  taxpayers  and  the  Internal  Revenue  Service.  This 
would  have  the  effect  of  limiting  the  presumption  to  those  low  bal- 
ance, high  volume  loans  and  receivables  for  which  the  administra- 
tive burdens  of  proving  worthlessness  on  a  loan-by-loan  basis  are 
most  readily  apparent. 

The  Treasury  Department  has  raised  concerns  about  this  pro- 
posal for  reasons  that  appear  to  give  insufficient  weight  to  the 
basic  principle  of  competitive  equality  that  underlies  AFSA's  sup- 
port. We  are  confident  that  Treasures  concerns  may  be  satisfied. 

First,  the  current  book-tax  conformity  rule  for  banks  and  other 
regulated  institutions  was  found  by  Treasury  in  its  report  on  bad 
debts  to  be  supported  by  general  tax  principles  and  not  by  any  spe- 
cial status  of  regulated  entities. 

Second,  the  use  of  specific,  objective  criteria  for  worthlessness, 
such  as  the  length  of  delinquency,  in  the  case  of  consumer  install- 
ment loans  and  credit  card  debt,  would  help  assure  that  chargeoff 
standards  will  be  uniform  for  all  creditors  with  similar  types  of 
loans  and  be  relatively  easy  to  administer  for  both  taxpayers  and 
the  IRS. 

Third,  the  oversight  and  expertise  regulators  bring  to  this  issue 
is  embodied  almost  entirely  in  establishing  the  objective  chargeoff 
criteria  and  not  in  performing  detailed  audits,  thus  making  moot 
the  absence  of  regulatory  oversight  of  other  taxpayers  that  seek  to 
apply  those  same  rules. 

Finally,  AFSA  maintains  that  unregulated  creditors  would  be  no 
more  prone  to  take  advantage  of  a  book-tax  conformity  rule  to  ac- 
celerate tax  deductions  than  would  their  regulated  competitors.  In 
any  event,  the  ability  to  accelerate  chargeoffs  would  be  precluded 
since  bad  debt  deductions  would  be  allowable  no  earlier  than  the 
time  specified  in  the  appropriate  regulatory  guidelines. 

In  conclusion,  I  would  like  to  thank  the  chairman  and  the  mem- 
bers of  the  subcommittee  for  their  attention  this  morning.  My  own 
company  as  well  as  other  members  of  AFSA  are  interested  in  this 
and  other  pending  tax  legislative  proposals  that  raise  a  similar 
issue  regarding  comparable  tax  treatment  for  competitors  in  the  fi- 
nancial services  industry. 

We  appreciate  the  opportunity  we  have  had  to  meet  with  con- 
gressional and  Treasury  staff  to  discuss  this  issue,  to  provide  infor- 
mation regarding  our  industry  and  to  attempt  to  develop  a  work- 
able rule  that  reflects  sound  tax  policy.  We  look  forward  to  continu- 
ing to  work  with  you  and  the  staff  on  these  issues  as  the  legislative 
process  progresses. 

Mr.  KOPETSKI.  Thank  you  for  your  testimony. 

[The  prepared  statement  follows:] 


1155 


AMERICAN  FINANCIAL  SERVICES  ASSOCIATION 

TESTIMONY  REGARDING  BAD  DEBT  DEDUCTIONS  OP  NON-BANK  CREDITORS 

SUBCOMMITTEE  ON  SELECT  REVENUE  MEASURES  OF  THE 
HOUSE  WAYS  AND  MEANS  COMMITTEE 

SEPTEMBER  8.  1993 

Introduction 

Good  morning,  Mr.  Chairman  and  members  of  the  Subcommittee.  My 
name  is  Richard  P.  Romeo,  Vice  President  -  General  Tax  Counsel  of  American 
"Express  Travel  Related  Services  Company,  Inc. 

Today,  I  am  testifying  on  behalf  of  the  American  Financial  Services 
Association  (AFSA).  AFSA  is  the  nation's  largest  trade  association  representing 
non-bank  providers  of  consumer  financial  services.  Organized  in  1916,  AFSA 
represents  367  companies  operating  10,910  offices  engaged  in  extending  over 
$200  billion  of  consumer  credit  throughout  the  United  States.  These  companies 
range  from  independently-owned  consumer  finance  offices  to  the  nation's 
largest  financial  services,  retail,  and  automobile  companies.  Retail  and 
automobile  credit  is  extended  through  thousands  of  stores  and  dealers. 
Consumer  finance  companies  hold  over  $150  billion  of  consumer  credit 
outstanding  and  $67  billion  in  second  mortgage  credit,  representing  one 
quarter  of  all  consumer  credit  outstanding  in  the  United  States. 

We  appreciate  this  opportunity  to  testify  in  support  of  a  proposal  to  clarify 
when  a  debt  will  be  considered  worthless  for  tax  purposes  so  that  a  deduction 
may  be  obtained.  In  general,  the  proposal  would  allow  creditors  with  a  high 
volume  of  low  balance,  homogeneous  loans  to  establish  worthlessness  by 
reference  to  the  standards  that  have  been  provided  for  banks  and  other 
regulated  institutions.  AFSA's  support  for  this  proposal  is  based  upon  the  belief 
that  it  would  achieve  substantial  simplification  of  current  law,  would  assure  that 
taxpayers  in  similar  businesses  will  be  treated  similarly  for  tax  purposes,  and 
would  have  little  or  no  adverse  revenue  impact. 

WhY  New  Lgglslqtten  gn  Pqd  Pgbt  Pgductions  Is  NgcessqrY 

The  need  for  new  legislation  in  this  area  stems  from  the  repeal  of  the 
reserve  method  for  bad  debts  by  the  Tax  Reform  Act  of  1986.  Under  the  reserve 
method,  deductions  had  been  allowed  for  oddifions  to  a  reserve  for  bad  debts 
for  charge-offs  that  were  expected  to  occur  in  the  future. 

Since  the  repeal  of  the  reserve  method,  deductions  for  bad  debts  have 
been  allowed  only  in  the  year  in  which  the  debts  become  worthless  (or 
worthless  in  port)  and  charged  off.  For  companies  like  AFSA  members,  which 
typically  have  a  high  volume  of  relatively  small  loans  and  receivables,  proving 
worthlessness  on  a  loan-by-loan  basis  is  a  cumbersome  and  time  consuming,  if 
not  impossible  task.  In  addition  to  the  resources  required  on  the  port  of  both 
taxpayers  and  the  Internal  Revenue  Service  in  audits  of  bad  debt  deductions, 
taxpayers  face  the  risk  that  the  IRS  would  propose  disallowances  of  claimed 
deductions  that  may  not  be  easily  disproven  on  a  loan-by-loan  basis. 


1156 


For  regulated  financial  institutions  such  as  banks  and  thrifts.  Treasury 
regulations  now  afford  a  conclusive  presumption  allowing  conformity  of 
financial  accounting  and  tax  treatment  for  worthless  debts.  There  is  no  such 
standard  that  applies  to  unregulated  creditors  such  as  AFSA  members,  even 
though  they  compete  with  regulated  lenders  and  hold  similar  loans  and 
receivables.  In  our  view,  this  disparity  in  treatment  of  similarly  situated  taxpayers 
is  unnecessary  and  unfair,  and  this  legislative  proposal  is  on  appropriate 
response  to  the  problem. 


Thg  Trggsmry  Pgpqrtmgnt  Rgpcrt  tg  thg  Conqrg??  on  Pod  Pebt? 

In  connection  v^th  the  repeal  of  the  reserve  method  for  bad  debts  in 
1986,  Congress  directed  the  Treasury  Department  to  study  and  issue  a  report  on 
"appropriate  criteria  to  be  used  to  determine  if  a  debt  is  worthless'  for  tax 
purposes,  and  to  "consider  under  what  circumstances  a  conclusive  or 
rebuttable  presumption  of  the  worthlessness  of  an  indebtedness  is  appropriate" 
(H.  R.  Conf.  Rep.  No.  841 ,  99th  Cong.  2d  Sess.  II  -316  (1986)). 

While  AFSA  closely  monitored  the  progress  of  the  Treasury  Department 
study  and  was  even  afforded  the  opportunity  to  provide  input  concerning  the 
business  of  its  members,  the  conclusions  and  recommendations  that  resuited 
from  the  studf  essentially  left  our  industry  in  limbo. 

In  its  report  ("Report  to  the  Congress  on  the  Tax  Treatment  of  Bod  Debts 
by  Financial  Institutions",  Department  of  the  Treasury,  September  17, 1991) 
(hereinafter  "Treasury  Report"),  Treasury  defended  the  book-tax  conformity  rule 
that  applies  to  regulated  lenders  on  the  ground  that  "the  regulatory  and  tax 
definitions  of  assets  that  should  be  charged  off  are  quite  similar  in  that  they  are 
both  based  on  apparent  uncollectibility,  notwithstanding  the  p>ossibility  of  partial 
recovery  at  some  time  in  the  future"  (Treasury  Report,  page  22). 

While  noting  that  the  book-tax  conformity  approach  was  available  only 
to  regulated  lenders.  Treasury  did  acknowledge  the  fundamental  similarities 
between  the  lending  activities  of  non-bank  financial  sery/ices  companies  and 
banks,  and  the  problems  that  non-banks  face  without  a  similar  bod  debt 
standard: 

"These  nondepository  institutions  resemble  regulated  lenders  in  a 
number  of  ways.  They  typically  hold  large  portfolios  of 
homogeneous  loan  receivables.  Like  large  banks,  they  ore  not 
permitted  to  use  the  reserve  method  in  computing  the  deduction 
for  bad  debts.  As  a  consequence,  they  face  similar  difficulties  in 
evaluating  the  quality  of  assets  in  their  portfolios  on  a  loan-by-loan 
basis  for  purposes  of  determining  their  bod  debt  deductions.  But 
because  they  are  not  subject  to  the  regime  of  state  and  federal 
regulation  that  governs  depository  institutions,  the  conclusive 
presumption  allowing  conformity  of  tax  and  book  treatment  of 
worthless  debts  is  not  available  to  them.  Therefore,  in  the  absence 
of  the  reserve  method,  these  taxpayers  must  use  the  specific 
charge-off  method  for  deducting  worthless  debts  and  support  such 
deductions  with  'all  F>ertinent  evidence'  if  challenged  by  the 
Internal  Revenue  Service. 

In  view  of  many  similarities  between  these  unregulated 
lenders  and  depository  institutions  and  the  burdens  imposed  by  the 
ioan-by-loan  analysis  required  under  the  specific  charge-off 
method,  it  is  worthwhile  to  consider  whether  such  lenders  should 


1157 


have  some  sort  of  book/tax  conformity  rule  now  availoble  to  bonks 
and  thrifts."  (Treasury  Report,  page  29) 

Treasury  expressed  the  view  that  because  of  the  absence  of  regulatory 
oversight,  a  book-tax  conformity  rule  for  such  creditors  should  be  qualified  by 
some  additional  standard  to  deter  overly  aggressive  charge-off  policies  to 
obtain  tax  advantages.  Among  the  various  approaches  that  could  be  used  in 
'developing  a  proxy  for  regulatory  oversight"  is  the  so-called  "identical 
standards"  approach,  which  most  closely  approximates  the  proposal  under 
consideration.  Under  this  approach,  the  determination  of  worthlessness  for  tax 
purposes  of  particular  types  of  debts  held  by  any  creditor,  whether  or  not 
regulated,  would  be  determined  by  reference  to  the  standards  sefby  bank 
regulatory  authorities.  Treasury's  evaluation  of  this  method  was  largely 
favorable: 

The  identical  standards  approach  is  appealing  in  that  it  adopts 
identifiable  objective  standards  for  determining  worthlessness  and 
seeks  to  create  parity  between  the  treatment  of  regulated  and 
unregulated  lenders  with  respect  to  similar  types  of  loans .... 
(W)e  believe  the  substance  of  this  proposal  may  provide  a 
promising  basis  for  the  development  of  a  workable  conformity  rule 
and  would  have  on  insignificant  revenue  effect."  Creasury  Report, 
page  31) 

Treasury  concluded  that  extending  a  book-tax  conformity  rule  to  creditors 
other  than  regulated  lenders  would  be  a  departure  from  settled  policy  and 
practice  that  should  be  introduced  with  Congressional  approval  rather  than  by 
unilateral  regulatory  action.  This  is  what  prompted  the  introduction  of  the 
legislative  proposal  now  under  consideration. 


How  the  Proposed  Rule  Would  Operate 

tt  is  important  to  note  that  the  proposal  would  not  impose  a  book-tax 
conformity  rule  foroU  bad  debt  deductions.  Rather,  a  conclusive  presumption 
of  worthlessness  would  be  provided  only  with  respect  to  those  types  of  debts  for 
which  bank  regulatory  authorities  hove  prescribed  specific,  objective  rules  that 
can  be  readily  applied  by  taxpayers  and  the  Internal  Revenue  Service.  To  the 
extent  that  regulatory  authorities  require  an  examination  of  all  facts  and 
circumstances  relating  to  a  particular  loan,  rather  than  such  objective  criteria, 
there  would  be  no  presumption  of  worthlessness  based  upon  book-tax 
conformity.  This  would  have  the  effect  of  limiting  the  presumption  to  those  low 
balance,  high  volume  loans  and  receivables  for  which  the  administrative 
burdens  of  proving  worthlessness  on  a  loan-by-loan  basis  are  most  readily 
apparent. 

Thus,  the  Treasury  Report  notes  that  the  Comptroller  of  the  Currency's 
Handbook  for  National  Bank  Examiners  adopts  mechanical,  automatic  charge- 
off  procedures  for  high-volume  loans  (such  as  consumer  installment  loans,  credit 
card  plans,  and  check  credit  plans)  that  look  solely  to  the  time  the  debt  has 
been  delinquent.  Similar  rules  regarding  "consumer  credit"  have  been 
promulgated  by  the  Office  of  Thrift  Supervision  (12  C.F.R.  §  561).  Instead  of 
performing  a  loan-by-loan  review,  a  bank  examiner  confirms  that  the  proper 
automatic  charge-off  procedures  have  been  adopted  and  followed.  Use  of  a 
similar  approach  by  IRS  auditors  examining  nondepository  financial  services 
companies  would  significantly  diminish  audit  burdens  for  both  taxpayers  and 
the  IRS  and  bring  much-needed  certainty  to  the  issue  of  deductions  for 
worthless  debts.  In  addition,  it  is  important  to  note  Treasury's  conclusion  that 


1158 


basing  a  book-tax  conformity  rule  for  nondepository  providers  of  consumer 
financial  services  on  an  "identical  standards"  approach  "would  have  an 
insignificant  revenue  effect." 

The  approach  of  bank  regulators  in  determining  worthlessness  on  the 
basis  of  a  single  fact,  ler>gth  of  delinquency,  may  appear  to  depart  from  tax 
precedents  calling  for  consideration  of  "all  p>ertinent  evidence."  However, 
Treasury  noted  that  the  unsecured  nature  of  most  consumer  debt  "may  cause 
that  single  fact  to  be  an  adequate  measure  of  worthlessness  for  tax  purposes. 
In  any  event,  the  high  volume  of  such  loans  and  their  comparatively  low  face 
value  would  moke  an  in-depth  inquiry  into  all  relevant  facts  and  circumstances 
a  very  burdensome  task  for  the  lending  institution"  G'reasury  Reportrpage  23). 


Response  to  Treasury  Department  Concerns  About  the  Proposal 

The  principle  that  underlies  AFSA's  support  for  this  proposal  is  that  there 
should  not  be  a  disparity  in  the  tax  rules  for  bad  debt  deductions  applicable  to 
competitors  in  the  financial  services  industry  based  solely  upon  whether  or  not  a 
taxpayer  is  regulated  for  norv-tax  purposes.  In  this  regard,  we  note  that  the 
Treasury  Department  has  submitted  testimony  in  opposition  to  the  proposal  for 
reasons  that  appear  to  conflict  v^flth  this  basic  principle  of  competitive  equality. 
We  are  confident  that  Treasury's  concerns  may  be  satisfied,  and  we  would  like 
to  address  those  concerre  for  the  record  at  this  time. 

The  written  comments  on  this  issue  submitted  to  this  Subcommittee  on 
June  22, 1993  by  Assistant  Secretary  of  the  Treasury  (Tax  Policy)  Leslie  B.  Samuels 
provided  as  follows: 

"The  rules  concerning  bad  debts  of  federally  regulated  financial 
institutions  recognize  their  special  status  which  is  not  shared  by  non- 
federally  regulated  institutions.  There  are  no  assurances  in  the  case 
of  unregulated  lenders  that  the  debts  will  be  worthless  under 
general  tax  principles  when  charged  off  for  book  purposes,  or  that 
uniform  charge-off  standards  will  be  applied.  In  addition,  the 
absence  of  federal  regulatory  oversight  provides  unacceptable 
opportunities  for  distortions,  particularly  in  the  form  of  accelerated 
charge-offs." 

The  concerns  expressed  by  Assistant  Secretaiy  Samuels  were  in  large  part 
addressed  in  the  Treasury  Department's  own  report  to  the  Congress  on  bad 
debt  deductions  cited  earlier  in  this  statement.  Thus,  the  special  book-tax 
conformity  rule  that  now  applies  with  respect  to  the  bad  debt  deductions  of 
banks  and  other  regulated  institutions  is  not  based  merely  upon  their  "special 
status"  as  regulated  entities.  Rather,  Treasury  viewed  that  rule  as  jusfified  by  the 
fact  that  "the  regulatory  and  tax  definitions  of  assets  that  should  be  charged  off 
are  quite  similar  in  that  they  are  both  based  upon  apparent  uncollectibility, 
notwithstanding  the  F>ossibility  of  partial  recovery  at  some  time  in  the  future" 
(Treasury  Report,  page  22).    Even  where  a  single  fact,  the  length  of 
delinquency,  determines  worfhiessness  for  regulatory  purposes  of  consumer 
installment  and  credit  card  debt,  Treasury  was  satisfied  that  "it  is  appropriate  to 
permit  the  regulatory  loss  classification  to  determine  the  worthlessness  of  such 
debts  for  tax  purposes"  (Treasury  Report,  page  23). 

In  short,  even  though  regulators  might  be  expected  to  have  a  more 
conservative  approach  to  bad  debt  charge-offs  than  tax  auditors.  Treasury 
concluded  that  the  regulatory  criteria  were  in  fact  consistent  with  the  "general 
tax  principles"  referred  to  by  Assistant  Secretary  Samuels.  We  submit  that  this 


1159 


should  be  true  whether  or  not  the  particular  taxpayer  whose  debts  the  criteria 
are  applied  to  is  regulated. 

We  believe  that  the  concern  that  the  charge-off  standards  to  be  applied 
should  be  "uniform'  would  be  satisfied  by  the  relatively  limited  scope  and  terms 
of  the  proposed  rule.  As  stated  earlier,  the  rule  should  apply  only  to  those 
sp>ecific  types  of  debts  characterized  by  their  relatively  high  volume  and  low 
balances  for  which  regulators  prescribe  specific,  objective  criteria  for 
worthlessness  (such  as  the  length  of  delinquency,  in  the  case  of  consumer 
installment  loans  and  credit  card  debt).  In  the  cose  of  other  types  of  loans  for 
which  a  more  subjective,  "facts  and  circumstances"  analysis  is  made  by 
regulators,  there  would  be  no  book-tax  conformity  presumption.  Relying  solely 
up>on  objective  criteria  should  alleviate  any  concern  regarding  uniformrty. 

The  concern  that  the  absence  of  federal  regulation  presents 
unacceptable  opportunrties  for  tax  avoidance  overstates  the  role  regulators 
perform  with  respect  to  the  types  of  loans  in  question.  Instead  of  a  loan-by-loan 
review,  an  on-site  examination  of  a  bank  by  a  regulator  is  limited  to  "confirming 
that  the  proper  automatic  charge-off  procedures  have  been  adopted  for 
installment  and  credit  card  loons"  (Treasury  Report,  page  16).  Thus,  the 
oversight  and  expertise  regulators  bring  to  this  issue  is  embodied  almost  entirely 
in  establishing  the  objective  charge-off  criteria  that  may  be  applied  to  loans 
held  by  any  creditor,  whether  regulated  or  unregulated.  The  absence  of 
detailed  regulatory  audits  with  respect  to  such  loans  tends  to  make  moot  the 
absence  of  regulatory  oversight  of  other  taxpayers  that  seek  to  apply  those 
same  rules.  Further,  the  relatively  streamlined  audit  inquiry  into  whether  an 
institution's  charge-off  procedures  comply  with  objective  regulatory  standards 
confirms  the  administrative  advantages  of  this  approach  and  responds  to  the 
administrative  concerns  Assistant  Secretary  Samuels  cited  in  his  oral  testimony. 

AFSA  maintains  that  unregulated  creditors  would  be  no  more  prone  to 
take  advantage  of  a  book-tax  conformity  rule  to  accelerate  tax  deductions 
than  would  their  regulated  competitors.  Unregulated  finance  companies,  like 
banks,  need  to  report  strong  earnings  to  maintain  their  good  standing  wrth  debt 
rating  agencies,  creditors  and  shareholders.  In  any  event,  since  bad  debt 
deductions  would  be  allowable  no  earlier  than  the  time  specified  in  the 
appropriate  regulatory  guidelines,  the  ability  to  accelerate  charge-offs  to 
obtain  earlier  tax  deductions  for  bad  debts  would  be  precluded. 

Assistant  Secretary  Samuels  also  stated  that  smaller,  privately-held  lenders 
would  be  disadvantaged  if  the  proposal  would  apply  only  to  their  publicly-held 
competitors.  AFSA  agrees  with  this  concern.  A  tax  standard  for  bad  debt 
deductions  that  is  based  upon  objective  criteria  set  forth  by  bank  regulators 
should  be  available  to  all  taxpayers,  regardless  of  whether  they  are  public  or 
private,  regulated  or  unregulated. 


I  would  like  to  thank  the  Chairman  and  the  members  of  the 
Subcommittee  for  their  attention  this  morning.  My  own  company  as  well  as 
other  members  of  AFSA  are  interested  in  this  and  other  pending  tax  legislative 
proposals  that  raise  a  similar  issue  regarding  comparable  tax  treatment  for 
competitors  in  the  financial  services  industry.  We  appreciate  the  opportunity 
we  have  had  to  meet  with  Congressional  and  Treasury  staff  to  discuss  this  issue, 
to  provide  information  regarding  our  industry  and  to  attempt  to  develop  a 
workable  rule  that  reflects  sound  tax  policy.  We  look  forward  to  continuing  to 
work  with  you  and  the  staff  on  these  issues  as  the  legislative  process  progresses. 


1160 

Mr.  KOPETSKI.  I  want  to  begin  questioning  with  Mr.  OToole. 

Organizations  such  as  Nellie  Mae  have  been  subsidized  gener- 
ously by  Federal  tax  benefits  in  the  past.  Now  you  feel  that  you 
could  better  serve  the  needs  of  student  borrowers  by  converting  to 
for  profit  status.  Why  the  change  in  philosophy? 

Mr.  OToole.  Thank  you,  Mr.  Chairman. 

Organizations  such  as  ours  have  been  nonprofit  organizations 
from  the  start  as  required  by  the  code.  All  of  the  earnings  or  the 
accumulation  of  net  assets  that  have  been  created  over  that  period 
of  time,  since  the  beginning  of  those  organizations'  existence,  would 
stay  within  those  organizations  and  be  dedicated  to  nonprofit  pur- 
poses, broader  nonprofit  purposes,  than  just  the  Federal  student 
loan  programs  but  still  purposes  associated  with  fostering  edu- 
cational opportunity  in  a  nonprofit  sense. 

Our  suggestion  is  that  in  order  to  meet  the  student  loan  funding 
needs  during  the  4-year  transition  period  that  we  be  permitted  to 
establish  a  successor  corporation  under  the  rules  and  restrictions 
set  out  in  H.R.  2603.  We  are  expecting  that  under  the  current  law 
private  lending  will  be  phased  down  from  the  current  program  vol- 
ume, but  that  demand  will  not  change.  We  are  expecting  that  orga- 
nizations such  as  ours,  that  are  among  the  largest  providers  of  stu- 
dent loan  capital  in  the  country  which  support  Federal  programs, 
will  be  called  upon  to  provide  still  greater  levels  of  student  loan 
funding  in  response  to  phase  down  of  private  funding.  With  the 
changes  to  the  current  program  enacted  by  the  Congress  and  devel- 
oped by  the  education  committees,  there  will  be  greater  difficulty 
during  the  transition  in  raising  funds  sufficient  to  meet  the  student 
loan  capital  needs  because  of  the  reductions  in  yields  and  the 
greater  risk  sharing  associated  with  student  loans.  Thus,  we  are 
looking  for  an  opportunity  to  be  able  to  strengthen  the  balance 
sheet  of  our  organizations  by  injections  of  equity  investment  that 
would  allow  us  to  then  leverage  that  equity  investment  to  greater 
levels  of  debt  financing  to  meet  those  student  loan  capital  needs  in 
support  of  the  student  loan  program  during  the  transition. 

Mr.  KOPETSKI.  Mr.  Hoagland,  do  you  have  any  questions  of  Mr. 
OToole? 

Mr.  Hoagland.  Not  of  Mr.  OToole. 

Mr.  KOPETSKI.  Mr.  Uvena,  under  your  proposal  there  would  be 
a  great  expansion  of  ESOPs  as  a  means  of  providing  employee  re- 
tirement benefits.  Prior  laws  which  provided  tax  favored  treatment 
for  ESOPs  resulted  in  providing  greater  tax  benefits  to  employers 
and  others  engaged  in  ESOP  transactions  without  ensuring  in- 
creased rights  of  ownership  for  participating  employees.  Can  we  ex- 
pect to  see  a  recurrence  of  similar  concerns  under  your  proposal? 

Mr.  UvENA.  I  would  hope  not.  There  are  other  laws  governing 
ESOPs  which  remain  and  serve  legitimate  purposes.  What  we  sug- 
gest, it  be  reinstated  is  a  very  narrow  one  directed  just  to  provide 
stock  to  employees.  In  our  company  we  have  a  fully  funded  defined 
benefit  retirement  plan  which  will  not  change,  which  did  not 
change  during  this  period  of  time.  In  fact,  it  was  very  clear  that 
this  was  a  tax  funded  benefit  and  that  was  clearly  communicated 
to  our  employees.  It  was  never  a  substitute  for  compensation,  for 
retirement  or  any  other  benefits. 

Mr.  KoPETSKL  I  see. 


1161 

Mr,  Romeo,  are  members  of  your  association  prepared  to  accept 
other  tax  rules  applicable  to  your  competitors  in  the  financial  serv- 
ices area?  For  example,  the  recently  passed  budget  reconciliation 
bill  contains  a  provision  that  would  require  banks  and  thrifts  to  re- 
port to  the  IRS  wnth  respect  to  discharges  of  indebtedness  in  excess 
of  $600.  Would  you  object  if  this  reporting  requirement  were  ex- 
tended to  all  companies  engaged  in  the  business  of  making  loans? 

Mr.  Romeo.  We  are  very  much  aware  of  that  provision.  It  was 
added  in  the  recently  enacted  bill,  and  it  only  applies  to  regulated 
institutions.  While  we  believe  that  there  is  an  insignificant  revenue 
effect  with  regard  to  the  bad  debt  proposal,  we  think  extending  the 
reporting  requirement  would  be  consistent  with  the  idea  of  com- 
petitive equality  and  parity  so  that  the  same  rule  should  apply. 

In  fact,  many  of  us  have  regulated  institutions  within  our  con- 
solidated groups  and  do  in  fact  have  to  comply  with  that  rule  as 
to  those  entities  anyway.  We  think  an  extension  of  the  rule  would 
be  consistent  with  the  principle  that  underlies  our  support  for  the 
bad  debt  rule.  So,  yes,  Mr.  Chairman,  we  have  seen  it  linked. 
There  is  not  necessarily  a  quid  pro  quo  between  the  bad  debt  and 
information  reporting  proposals,  but  they  certainly  stem  from  the 
same  principle  of  treating  all  competitors  in  the  financial  services 
industry  on  a  level  playing  field. 

Mr.  KOPETSKI.  I  appreciate  your  openness.  Mr.  Hoagland. 

Mr.  Hoagland.  Let  me  say,  Mr.  Romeo,  that  I  am  pleased  that 
you  specifically  addressed  Treasury's  concerns  in  your  testimony. 

Mr.  Samuels  indicated  reservations  earlier,  and  you  have  ad- 
dressed those  reservations  and  I  concur  with  your  analysis. 

Let  me  indicate  that  my  staff  is  currently  working  with  Amer- 
ican Express  and  other  members  of  the  association  together  with 
Joint  Tax  to  gather  the  information  necessary  to  develop  legislation 
that  will  satisfy  Treasury  and  at  the  same  time  provide  a  method 
that  will  permit  nonbank  lenders  to  establish  the  worthlessness  of 
low  balance,  homogeneous  loans  by  reference  to  standards  similar 
to  those  that  have  been  provided  for  banks  and  thrifts.  I  think  we 
ought  to  be  able  to  do  it,  don't  you? 

Mr.  Romeo.  Yes,  sir.  I  thank  you  for  your  interest  in  this  issue 
and  your  efforts  in  getting  it  into  the  legislative  arena  and  under 
discussion  at  this  time. 

Mr.  Hoagland.  We  have  a  rule  for  regulated  institutions,  banks 
and  thrifts  that  works  well,  and  I  think  there  is  no  reason  we  can't 
extend  that  to  nonbank  institutions. 

Mr.  Romeo.  In  that  regard  I  wish  to  emphasize  that  we  are  not 
talking  about  a  blanket,  across-the-board  parity  rule  under  which 
whatever  is  deductible  for  book  purposes  should  be  deductible  for 
tax  purposes.  We  are  talking  about  a  more  limited  class  of  loan,  the 
relatively  low  balance,  high  volume  situation.  Some  of  our  compa- 
nies, like  banks,  have  millions  of  these  types  of  accounts,  such  as 
consumer  installment  loans,  credit  card  debt,  et  cetera.  The  ability 
to  be  able  to  look  at  those  on  a  loan-by-loan  basis  is  simply  an  im- 
possible task. 

Those  are  the  type  of  loans  for  which  regulators  have  specified 
some  fairly  workable  rules  that  can  be  applied  by  anybody  who  has 
that  type  of  loan.  That  is  essentially  the  standard  we  are  seeking 
to  adopt  here  and  have  available  for  tax  purposes. 


1162 

Mr.  HOAGLAND.  It  would  simplify  the  process  for  IRS  and  all 
companies  involved? 

Mr.  Romeo.  Yes,  sir.  We  think  it  is  very  much  a  step  toward  ad- 
ministrative simplification.  Having  a  bright  line  test,  while  it  may 
be  rough  in  some  regard,  certainly  would  be  easier  to  administer, 
minimize  audit  burdens,  and  minimize  the  time  and  resources  and 
effort  that  has  to  be  expended  by  both  taxpayers  and  IRS  in  audit- 
ing this  type  of  issue. 

Mr.  HOAGLAND.  I  don't  think  it  is  in  the  interest  of  IRS  or  the 
industry  to  be  required  to  determine  the  worthlessness  to  these 
loans  on  a  loan-by-loan  basis  and  we  can  and  should  move  to  a 
more  efficient  system. 

Mr.  Romeo.  We  agree  and  appreciate  your  support  for  that  effort. 
We  certainly  do  think  it  is  very  much  an  open  issue.  There  are 
some  details  that  we  need  to  work  out  with  congressional  and 
Treasury  staff  and  we  certainly  are  very  eager  to  continue  with 
that  process. 

Mr.  HOAGLAND.  Let's  hope  we  can  get  it  done.  Thank  you,  Mr. 
Chairman. 

Mr.  KOPETSKI.  I  thank  the  panelists  and  thank  vou  for  your  ex- 
pert advice  and  opinion  and  written  testimony  and  brevity. 

We  will  now  move  to  the  next  panel,  panel  three  out  of  seven 
panels  today.  We  will  move  to  the  advertising  arena  with  the  Com- 
mittee for  Competition  Through  Advertising,  Gerald  Gibian,  Cor- 
porate Vice  President,  Tax  and  Real  Estate,  Estee  Lauder  Co., 
N.Y.;  the  Ad  Hoc  Group  to  Preserve  Deduction  for  Advertising, 
Mark  McConaghy,  former  chief  of  staff  of  the  Joint  Committee  on 
Taxation;  and  the  Advertising  Tax  Coalition,  Timothy  White,  pub- 
lisher. Times  Union,  Albany,  N.Y.  With  him  is  DeWitt  Helm,  presi- 
dent. Association  of  National  Advertisers  of  New  York.  Welcome, 
gentlemen. 

Before  I  begin  the  testimony,  I  want  to  have  a  statement  of  my 
own  entered  into  the  record.  I  have  an  advertising  public  relations 
background.  I  will  let  my  bias  be  known  immediately. 

I  believe  firmly  that  advertising  goes  into  a  product  iust  as  much 
as  the  research  and  development  to  develop  the  product  and  the 
raw  materials  to  make  the  product.  We  recognize  that  in  our  legal 
system,  stressing  the  importance  of  our  copyright  laws. 

If  you  look  at  all  the  trade  negotiations,  one  of  the  centerpieces 
of  dispute  is  enforcement  of  the  intellectual  property  rights  because 
they  get  abused.  One  of  the  reasons  why  American  products  are  so 
valuable  is  the  amount  of  money  and  creativity  that  goes  into  the 
advertising  of  that  product. 

With  that  prejudgment  on  my  part,  I  will  now  turn  to  Mr.  Gibian 
from  Estee  Lauder  Co.  We  are  under  I  hope  a  5-minute  rule. 

[Mr.  Kopetski  submitted  the  following:] 


1163 


SUGGESTED  STATEMENT 
MR.  KOPETSKI 

Mr.  Chairman,  I  would  like  to  voice  my  opposition  to  the  proposal  to  limit  the 
deduction  for  advertising  expenses  -  this  proposal  is  tantamount  to  a  tax  on 
advertising.  Such  a  tax  could  seriously  disrupt  the  economy,  reduce  competition 
among  businesses  and  products  and  discriminate  against  small  businesses  as  well 
as  minority  and  small  media  outlets.  It  also  would  levy  higher  taxes  on  companies 
solely  because  they  have  large  advertising  budgets,  and  reduce  the  pubUc's  access  to 
news,  information  and  entertainment. 

The  tax  treatment  of  advertising  costs  is  governed  by  the  same  general 
principles  applicable  to  all  other  business  expenses.  The  recurring  nature  of  an 
expenditure  in  roughly  the  same  amoimts  each  year  suggests  that  the  benefits  of 
the  expenditure  do  not  last  beyond  the  year.  This  feature  is  characteristic  of 
virtually  all  advertising  expenses.  Moreover,  no  element  of  advertising  costs  is 
viewed  by  Congress  or  Treasury  as  a  tax  expenditure. 

Advertising  is  the  most  economically  e£5cient  means  of  marketing  a  product 
to  a  mass  society.  Advertising  allows  producers  to  deliver  goods  and  services  more 
efficiently  and  it  permits  consumers  to  significantly  improve  their  standards  of 
living  because  it  enhances  their  knowledge  of  and  their  access  to  better  quahty, 
lower  priced  products. 

Any  change  in  the  tax  law  that  makes  advertising  more  expensive  also  is 
likely  to  discourage  some  companies  from  introducing  new  products.  If  new 
entrants  cannot  advertise  as  effectively  and  efficiently  they  will  have  a  lower 
probabiUty  of  success. 

At  a  time  when  Treasury  and  the  Congress  are  looking  at  ways  to  simphfy 
the  tax  code,  a  law  which  defers  a  deduction  for  "advertising"  expenses  would  add 
complexity  and  be  too  imprecise  to  be  workable.  The  Treasury  would  be  forced  to 
attempt  to  draw  lines  which  would  rule  one  type  of  marketing  expense  "advertising" 
and  another  not.  Is  a  free  copy  of  a  newspaper  an  advertising  or  a  production 
expense?  Is  the  salary  of  the  marketing  director  to  be  divided  by  some  formula 
between  advertising  and  non-advertising?  Unworkable  concepts  create  complexity, 
high  compliance  costs,  and  disrespect  for  the  tax  system.  When  the  tax  law  makes 
distinctions  that  are  not  economically  real,  confusion  follows. 


1164 

STATEMENT  OF  GERALD  Z.  GIBIAN,  CORPORATE  VICE  PRESI- 
DENT, TAX  AND  REAL  ESTATE,  ESTEE  LAUDER  CO., 
MELVDLE,  N.Y.,  ON  BEHALF  OF  COMMITTEE  FOR  COMPETI- 
TION  THROUGH  ADVERTISING 

Mr.  GiBlAN.  Thank  you  very  much.  I  am  Gerald  Gibian,  corporate 
vice  president,  tax  and  real  estate,  of  the  Estee  Lauder  Cos.  Estee 
Lauder  is  a  member  of  the  Committee  for  Competition  Through  Ad- 
vertising. 

On  behalf  of  the  committee,  I  appreciate  the  opportunity  to  tes- 
tify before  you  today  in  opposition  to  a  proposal  to  capitalize  adver- 
tising costs  and  amortize  them  over  a  period  of  years. 

The  Committee  for  Competition  Through  Advertising  is  made  up 
of  companies  in  various  industries  associated  with  advertising,  in- 
cluding the  companies  that  must  advertise  their  products  in  order 
to  compete  in  the  domestic  and  international  marketplaces,  the 
companies  that  assist  them  in  communicating  their  message,  and 
the  companies  that  provide  the  media  for  carrying  that  message. 

Raising  consumer  awareness  of  our  products  and  providing  infor- 
mation about  the  prices  and  features  of  our  products  are  an  inte- 
gral part  of  our  efforts  to  compete  in  the  global  marketplace  and 
to  continue  to  make  certain  that  U.S.  companies  remain  pre- 
eminent. 

It  is  obviously  not  in  the  interest  of  businesses  that  must  adver- 
tise to  establish  and  expand  the  markets  for  their  products  and 
services  to  be  subject  to  a  tax  penalty  for  costs  related  to  selling 
their  products  and  services.  Nor  is  it  in  the  interest  of  these  busi- 
nesses that  provide  the  media  for  advertising,  including  television 
and  radio  stations,  newspapers,  magazines,  publishers  of  yellow 
pages  and  sports  franchisers.  It  is  also  not  in  the  interest  of  firms 
that  provide  support  services  for  advertising.  However,  what  we 
wish  to  focus  on  today  are  the  numerous  reasons  that  it  is  not  in 
the  interest  of  the  general  public  to  impose  this  new  tax  burden. 

The  increased  cost  of  advertising  as  a  result  of  this  proposal 
would  present  a  barrier  to  market  expansion  for  producers  of  goods 
and  services.  Companies  that  will  be  hardest  hit  by  the  increased 
cost  will  be  both  startup  ventures  and  established  businesses  that 
must  continually  introduce  new  products.  In  both  cases,  more  ad- 
vertising is  needed  to  make  the  products'  existence  and  attributes 
known  to  potential  customers. 

Creating  barriers  for  new  products  entering  the  marketplace  will 
also  result  in  less  product  innovation,  causing  the  United  States  to 
lose  global  competitiveness.  In  addition,  U.S.  producers  of  goods 
and  services  will  be  at  a  competitive  disadvantage  vis-a-vis  goods 
and  services  produced  by  foreign-owned  companies,  because  vir- 
tually all  of  our  trading  partners  permit  a  tax  deduction  for  adver- 
tising. 

Finally,  this  proposal  will  have  a  particularly  devastating  effect 
on  small  businesses  which  rely  heavily  on  advertising  for  short- 
term  business  growth. 

In  summary,  the  proposal  to  require  the  amortization  of  advertis- 
ing expenses  does  not  have  a  sound  policy  basis.  It  is  bad  tax  pol- 
icy. It  is  bad  economic  policy.  It  does  not  make  business  sense.  To 
make  this  clear,  there  are  some  points  I  would  like  to  highlight: 


1165 

First  is  the  mismatching  of  income  and  expense.  Under  current 
law,  advertising  costs  are  subject  to  the  same  principles  as  other 
business  expenses  for  determining  whether  they  should  be  de- 
ducted in  the  year  incurred.  The  Tax  Code  does  not  provide  special 
treatment  of  advertising.  Recurring  expenditures  are  generally 
found  to  be  currently  deductible  because  the  need  to  renew  the 
benefits  through  additional  expenditures  each  year  suggests  a  use- 
ful life  of  less  than  a  year. 

The  reasoning  behind  the  argument  for  requiring  amortization  of 
advertising  is  abstract.  A  conceptual  argument  is  made  that  adver- 
tising is  like  capital  spending  on  equipment  and  structures.  There 
is  little  evidence  to  substantiate  such  a  claim.  If  anything,  eco- 
nomic studies  show  that  the  value  of  most  advertising  is  entirely 
eliminated  within  1  year. 

However,  I  can  tell  you  for  more  than  20  years  in  the  consumer 
products  industry,  which  is  heavily  reliant  on  advertising,  that  a 
large  proportion  of  all  advertising  refers  to  offers  of  short  duration. 

For  example,  in  the  cosmetic  industry  much  of  our  advertising  is 
seasonal,  focused  on  holidays.  Similarly,  retail  advertising  is  di- 
rected at  the  sale  of  goods  directly  to  consumers  within  a  short  pe- 
riod of  time.  Also,  weekly  newspaper  ads  by  a  local  supermarket 
announcing  the  price  of  lettuce  have  little  value  next  month,  much 
less  next  year. 

Classified  advertising  is  similar.  In  addition,  promotion  advertis- 
ing is  designed  to  provide  an  incentive  for  immediate  sales,  and  in 
point  of  fact  most  coupons  have  an  expiring  date  of  less  than  1 
year. 

Direct  marketing  through  mail  or  telephone  sales  is  also  de- 
signed to  generate  immediate  sales.  Industries  suffering  from  fi- 
nancial problems  advertise  for  quick  sales. 

Finally,  advertising  affects  decay  quickly.  Even  well-known 
brands  that  stop  advertising  experience  a  rapid  decline  in  sales. 

Nevertheless,  a  proposal  requiring  amortization  of  advertising 
expenses  would  not  allow  a  complete  writeoff  of  expenditures  until 
years  after  such  expenditures  rendered  any  value  to  the  business. 
This  is  pure  mismeasurement  of  income,  and  a  pure  tax  penalty. 

In  addition,  complexity  would  be  increased.  There  would  be  re- 
duced competition.  There  would  be  a  distortion  of  business  prac- 
tices, and  revenue  would  not  be  significantly  enhanced. 

In  conclusion,  there  is  no  policy  justification  for  further  limiting 
the  deductibility  of  advertising  beyond  the  limitations  set  by 
present  law.  Enactment  of  any  proposal  would  create  a  barrier  to 
expansion  of  markets  for  goods  and  services,  thereby  impeding  eco- 
nomic growth  at  a  point  in  time  when  economic  growth  is  des- 
perately needed. 

In  addition,  such  a  proposal  would  reduce  competition  by  restrict- 
ing information  flow  and  impeding  the  ability  of  new  entrants  to 
challenge  established  firms.  It  would  also  add  substantial  complex- 
ity to  current  tax  rules. 

Thank  you  for  affording  me  the  opportunity  to  testify. 

Mr.  KOPETSKI.  Thank  you  very  much,  Mr.  Gibian. 

[The  prepared  statement  follows:] 


1166 


STATEMENT 

on 

CAPITALIZATION  OF  ADVERTISING  EXPENSES 

scheduled  for  hearings  on 

September  8, 1993 

before  the 

SUBCOMMITTEE  ON  SELECT  REVENUE  MEASURES 

of  the 

HOUSE  COMMITTEE  ON  WAYS  AND  MEANS 

as  part  of  their  hearings  on 

MISCELLANEOUS  REVENUE  ISSUES 

on  behalf  of  the 

Committee  for  Competition  Through  Advertising 

by 

Gerald  Z.  Gibian,  Estee  Lauder  Companies 


I  am  Gerald  Z.  Gibian,  Corporate  Vice  President  Tax  and  Real  Estate,  Estee  Lauder  Companies. 
Estee  Lauder  is  a  member  of  the  Committee  for  Competition  through  Advertising,  which 
represents  a  coalition  of  companies  in  various  industries  associated  with  advertising,  including  the 
companies  that  must  advertise  their  products  in  order  to  compete  in  the  domestic  and 
international  marketplaces,  the  companies  that  assist  them  in  communicating  their  message,  and 
the  companies  that  provide  the  media  for  carrying  that  message.  Raising  consumer  awareness  of 
our  products  and  providing  information  about  the  prices  and  features  of  our  products  are  an 
integral  part  of  our  efforts  to  compete  in  the  global  marketplace  and  continue  to  make  certain  that 
U.S.  companies  remain  pre-eminent 

On  behalf  of  the  Committee  for  Competition  through  Advertising,  which  includes  Estee  Lauder 
Companies;  J.  Walter  Thompson;  Ogilvy  and  Mather,  the  Omnicom  Group,  which  includes  the 
BBDO,  DDB  Needham,  and  TWBA  advertising  networks;  Hachette  Filipacchi  Magazines,  Inc., 
the  publishers  of  American  Photo,  Audio,  Boating,  Car  and  Driver,  Cycle  World,  Flying, 
''opular  Photography,  Road  and  Track,  Showboats  International,  Stereo  Review,  Woman's  Day, 
Elle,  Elle  Decor,  Home  Magazine,  Best  Selling  Home  Plans,  Metropolitan  Home;and  Euro 
RSCG  Holdings,  Inc,  Messner  Vetere  Berger  McNamee  Schmetterer,  Tatham,  Stranger  & 
Associates,  Creamer  Dickon  Basford,  Lally  McFarland  &  Pantello,  Robert  A.  Becker,  I  would 
like  to  thank  you  for  the  opportunity  to  express  our  views  on  a  proposal  that  would  replace 
immediate  write-offs  of  advertising  expenses  with  amortization  of  these  expenses  over  a  fixed 
number  of  years. 

It  is  obviously  not  in  the  interest  of  businesses  that  must  advertise  to  establish  and  expand  the 
markets  for  their  products  and  services  to  be  subject  to  a  tax  penalty  ~  which  is  what  this 
proposal  amounts  to  -  for  costs  related  to  selling  their  products  and  services.  Nor  is  it  in  the 
interests  of  those  businesses  which  provide  the  media  for  advertising,  including  television  stations, 
radio  stations,  newspapers,  magazines,  publishers  of  "yellow  pages,"  and  sports  franchises.  It  is 
also  not  in  the  interest  of  firms  that  provide  the  support  services  for  advertising  firms.  However, 
what  we  wish  to  focus  on  today  are  the  numerous  reasons  that  it  is  not  in  the  interest  of  the 
general  public  to  impose  this  new  tax  burden. 

The  increased  cost  of  advertising  as  a  result  of  this  proposal  would  present  a  barrier  to  market 
expansion  for  producers  of  goods  and  services,  which  could  result  in  lower  overall  economic 
growth.  Companies  that  will  be  hardest  hit  by  the  increased  cost  will  be  both  start-up  ventures, 
already  strapped  for  cash,  and  established  businesses  that  must  continually  introduce  new 
products.  In  both  cases,  more  advertising  is  needed  to  make  the  products  existence  and  attributes 
known  to  potential  customers.  Creating  barriers  for  new  products  entering  the  marketplace  will 
also  result  in  less  product  innovation,  causing  the  U.S.  to  lose  global  competitiveness.  In 
addition,  U.S.-owned  producers  of  goods  and  services  will  be  at  a  competitive  disadvantage  vis-^- 
vis  goods  and  services  produced  by  foreign-owned  companies  because  virtually  all  of  our  trading 
partners  permit  a  deduction  for  advertising.  Finally,  this  proposal  will  have  a  particularly 


1167 


devastating  effect  on  small  businesses,  which  rely  heavily  on  advertising  for  short-term  business 
growth. 

Increasing  the  cost  of  advertising  would  also  affect  publishers  and  broadcasters  and  the  wide 
public  access  to  news  and  information,  as  well  as  commercial  television  and  radio  programming, 
that  they  currently  can  provide  to  tiie  public  at  litde  or  no  charge  because  they  are  supported  by 
advertising.  Increased  costs  of  advertising  will  result  in  less  advertising  revenue  for  the  media  and 
likely  will  be  felt  more  in  smaller  communities.  Publishers  and  broadcasters  that  are  suffering 
financially  may  not  be  able  to  withstand  the  drop  in  advertising  revenue. 

In  summary,  the  proposal  to  require  the  amortization  of  advertising  expenses  does  not  have  a 
sound  policy  basis.  It  is  bad  tax  policy.  It  is  bad  economic  policy.  It  does  not  make  business 
sense.  To  make  this  clear,  there  are  five  additional  points  I  would  like  to  highlight: 

1 .  In  general,  the  anticipated  effect  of  advertising  is  to  increase  sales  in  the  immediate  future. 
Thus,  capitalizing  a  portion  of  advertising  expenses  would  create  a  mismatching  of  income 
and  expense  that  penalizes  companies  that  advertise  to  increase  sales  of  their  products. 

2.  Devising  and  implementing  a  definition  of  "advertising"  for  tax  purposes  would  be 
extremely  difficult  and  would  add  a  great  deal  of  complexity  to  the  tax  law. 

3.  Increases  in  the  after-tax  cost  of  advertising  reduce  competition. 

4.  Requiring  amortization  of  advertising  expenses  would  result  in  the  needless  distortion  of 
business  practices. 

5.  Behavioral  responses  to  a  requirement  to  capitalize  advertising  would  eliminate  a 
significant  portion  of  the  anticipated  revenue  gain. 

Mismatching  Inwmc  and  Expense 

Under  current  law,  advertising  costs  are  subject  to  the  same  principles  as  other  business  expenses 
for  determining  whether  they  should  be  deducted  in  the  year  incurred,  as  so-called  "period  costs," 
or  whether  tiiey  should  be  capitalized  and  amortized  over  a  period  of  years.  The  tax  code  does 
not  provide  special  treatment  of  advertising.  Reciuring  expenditures  are  generally  found  to  be 
cuirentiy  deductible  because  the  need  to  renew  the  benefits  through  additional  expenditures  each 
year  suggests  a  useful  life  of  less  than  a  year.  Colorado  Springs  National  Bank  v.  U.S..505  F.2d 
1 185,  1 192(1 0th  Cir.  1974).  The  reason  for  currently  deducting  most  normal  recurring 
advertising  has  been  stated  as  follows: 

"The  reason  advertising  expenses  are  (currently  expensed)  is  tiiat  these  expenses 
are  generally  of  a  yearly  recurring  nature  resulting  from  a  regular  activity  of  a 
taxpayer  which  produces  new  business  on  a  relatively  consistent  basis  each  year." 
ManhaMn  Cq,  Qf  Virginia.  Ing.,  50  T.C.  at  86  (1968). 

The  reasoning  behind  the  argument  for  requiring  amortization  of  advertising  is  abstract:  a 
conceptual  argument  is  made  that  advertising  is  like  capital  spending  on  equipment  and  structures. 
However,  although  this  is  a  theoretically  intriguing  argument,  there  is  litde  evidence  to 
substantiate  such  a  claim.  If  anything,  economic  studies  show  that  the  value  of  most  advertising  is 
entirely  eliminated  within  one  year.  A  recent  study '  partially  co-autiiored  by  two  Nobel 
Laureates  in  economics.  Dr.  Kenneth  J.  Arrow  and  Dr.  George  G.  Stigler,  concludes: 

[A]lthough  there  are  a  number  of  economic  studies  that  suggest  that 
advertising  is  long-lived,  tiiey  are  generally  so  fraught  witii  errors  that  one  caruiot 
rely  on  their  findings.  When  we  correct  for  some  statistical  problems,  we  find  that 


'      Kenneth  J.  Arrow,  George  G.  Stigler,  Elisabeth  M.  Landes,  and  Andrew  M.  Rosenfeld, 
Economic  Analvsis  of  Proposed  Changes  in  Tax  Treatment  of  Advertising  Expenditures. 
Lexicon,  Inc.,  Chicago,  April  1990. 


1168 


the  estimated  duration  intervals  are  much  shorter  than  originally  thought 
Moreover,  there  are  a  number  of  studies  (particularly  more  recent  ones)  that 
suggest  that  advertising  depreciates  so  rapidly  that  virtually  all  of  its  effects  are 
gone  within  a  year.  In  short,  the  economic  evidence  does  not  support  the  view 
that  advertising  is  long-lived. ^ 

For  those  that  do  not  trust  economists-even  those  with  Nobel  prizes-it  is  important  to  check 
their  claims  against  a  little  common  sense.  Obviously,  a  large  proportion  of  all  advertising  refers 
to  offers  of  short  duration.  Retail  advertising  is  directed  at  the  sale  of  goods  direcUy  to 
consumers  within  a  short  period  of  time.  For  example,  weekly  newspaper  ads  by  a  local 
supermarket  announcing  the  price  of  lettuce  have  littie  value  next  month,  much  less  next  year. 
Classified  advertising  is  similar.  In  addition,  promotion  advertising  (e.g.  where  cents-off,  refunds, 
premiums,  or  coupons  are  offered)  is  designed  to  provide  an  incentive  for  immediate  sales  and,  in 
point  of  fact,  most  coupons  have  an  expiration  date  of  less  than  one  year.  Direct  marketing, 
through  mail  or  telephone  sales,  is  also  designed  to  generate  immediate  sales.  Industries  suffering 
from  financial  problems  advertise  for  quick  sales.  Seasonal  products  are  advertised  for  short 
periods  during  the  year  with  the  objective  of  selling  as  much  as  possible  during  that  time.  In 
addition,  a  large  portion  of  new  product  advertising  clearly  has  little  value  after  one  year  because 
the  products  themselves  often  do  not  exist  after  one  year.  Furthermore,  the  Federal  Trade 
Commission  regulates  the  length  of  time  that  certain  advertisements  can  run.  An  advertiser 
cannot  describe  a  product  as  "new"  for  a  period  of  time  longer  than  six  months.  SfiS  Advisory 
Opinion  Digest,  No.  120,  April  15, 1967;  Advisory  Opinion  Digest,  No.  146,  October  24,  1967. 
Finally,  advertising's  effects  "decay"  quickly  -  even  well-known  brands  that  stop  advertising 
experience  a  rapid  decline  in  sales.  Nevertheless,  a  proposal  requiring  amortization  of  advertising 
expenses  would  not  allow  a  complete  write-off  of  expenditures  until  years  after  such  expenditures 
rendered  any  value  to  the  business.  This  is  pure  mismeasurement  of  income,  and  a  pure  tax 
penalty  to  businesses  simply  trying  to  promote  their  products. 

Of  course,  we  can  all  imagine  instances  when  advertising  does  have  a  useful  life  in  excess  of  one 
year.  However,  there  is  no  need  to  change  the  law  to  achieve  the  proper  tax  treatment  in  these 
cases.  Under  present  law,  there  are  already  established  criteria  for  determining  whether 
advertising,  like  any  other  business  expense,  should  be  capitalized  and  amortized  over  a  number  of 
years.3 

CQmplgyitY 

Any  proposals  that  require  amortization  of  expenses  would  add  a  new  layer  of  mind-numbing 
complexity  to  the  tax  law.  A  description  of  legislation  to  implement  this  proposal  could  be 
deceptively  simple,  but  the  Treasury  regulations  interpreting  this  rule  will  be  extremely 
complicated  and  will  be  followed  by  years  of  controversies  between  taxpayers  and  the  IRS  over 
which  costs  are  non-deductible  advertising  expenses  and  which  may  be  considered  to  be  some 
other  deductible  business  expense. 

The  term  "advertising"  is  just  one  component  of  general  marketing  expenses  incurred  by  business. 
Advertising,  promotion,  and  marketing  expense  can  take  many  forms.  Product  demonstrations, 
trade  shows,  free  samples,  price  discounts,  phone  solicitations,  mail  solicitations  (including  mail 
order  catalogs),  on-site  solicitation,  public  relations,  and  community  service  are  all  methods  that 
businesses  use  to  promote  themselves  and  their  products.  It  is  unclear  which  of  these  are 
"advertising"  under  the  proposal  and  which  are  not. 


2ld.  at  39-40. 

3§£s,  e.g.,  Welch  v.  Helvering.  290  U.S.  1 1  (1933)  (payments  to  promote  development  of 
business  and  to  establish  goodwill  of  prospective  customers);  Cleveland  Electric  Illuminating  Co. 
V.  U.S..  7  CI.  Ct  220  (1985)  (advertising  expenditures  intended  to  lessen  public  fears  about  a 
nuclear  power  plant);  Best  Lock  Corp.  v.  Comm'r..  31  T.C.  1217,  1234-5  (1959)  (expenditures  to 
produce  trade  catalogues);  Rev.  Proc.  89-16,  1989-1  C.B.  822  (package  design  costs);  Rev.  Rul. 
68-283, 1968-2  C.B.  63  (advertising  to  promote  products  at  state  fair  operated  over  two  tax 
•years). 


1169 


The  end  result  would  be  tremendous  uncertainty  for  taxpayers  that  are  acting  in  good  faith  and 
trying  to  comply  with  the  law.  It  is  important  to  remember  that  advertising  expenditures  are 
undertaken  by  hundreds  of  thousands  of  corporations,  partnerships,  and  sole  proprietorships  of  all 
sizes.  Their  uncertainty  would  not  be  reduced  after  the  publication  of  dozens  of  pages  of 
regulations  (probably  three  to  five  years  after  passage  of  the  initial  statute).  Even  scarier  is  the 
specter  of  hundreds  and  perhaps  thousands  of  accountants  and  attorneys  who  would  be  hired  by 
private  business  to  defend  us  against  the  onslaught  of  controversy  with  IRS.  On  the  government 
side,  a  legion  of  IRS  agents  would  have  to  be  trained  in  the  intricacies  of  this  new  law.  Steep 
compliance  costs  for  business  as  well  as  large  administrative  costs  for  the  Federal  government 
need  to  included  in  your  consideration  of  any  proposal  to  require  amortization  of  advertising. 
Although  they  do  not  appear  in  any  official  revenue  estimate,  these  costs  are  very  real. 

Rgtfwccd  Compctitign 

As  any  economist  will  tell  you-whether  it  is  the  stock  market  or  the  supermarket-it  is 
mformation  that  makes  markets  function  efficienUy.  Advertising  provides  essential  information  to 
consumers  and  businesses  and  thereby  promotes  competition.^  When  a  business  advertises  price 
and  quality,  it  forces  competitors  to  lower  prices  and  increase  quality. 

Furthermore,  the  consiuner  benefits  from  advertising  are  not  only  information  about  the  specific 
product  of  the  company  sponsoring  the  advertising  but  are  often  also  general  information  about 
that  product  which  may  be  sold  by  a  number  of  companies.  This  "spillover"  benefit  of  advertising 
is  especially  large  for  new  products  and  more  complex  products.  In  such  cases,  there  is  concern 
that  there  is  too  little  advertising  and  the  last  thing  that  should  be  done  is  penalize  such 
advertising.  For  example,  consider  the  introduction  of  a  new  type  of  low-fat  shortening  used  in  a 
wide  variety  of  food  products.  It  certainly  may  be  a  benefit  for  society  as  a  whole  to  be  better 
informed  about  a  product  that  can  improve  public  health,  but  it  does  not  pay  for  any  one  firm  to 
do  tiiis  advertising.  Therefore,  less  advertising  is  undertaken  tiian  is  socially  optimal. 

Finally,  advertising  is  the  great  equalizer.  By  means  of  advertising,  new  entrants  with  lower-cost 
or  higher-quality  products  can  enter  into  a  market  and  may  take  on  existing  dominant  firms.  By 
breaking  down  "barriers  to  entry,"  advertising  greatiy  increases  the  competition  within  an  industry 
and  the  overall  competitiveness  of  the  economy.  Increasing  the  cost  of  advertising  will 
disproportionately  hurt  start-up  businesses  and  businesses  with  new  products  that  are  more 
dependent  on  advertising.  In  addition,  tiie  increased  cost  will  be  particularly  hannful  to  marginal 
businesses  that  depend  on  advertising  to  create  a  quick  boost  in  sales.  Small  business,  in 
particular,  will  be  hurt  by  this  proposal  because  they  are  very  dependent  on  advertising  for  short- 
term  sales  to  create  the  cash  to  build  their  business. 

Not  only  would  the  capitalization  of  advertising  result  in  reduced  competition  in  the  marketplace, 
but  also  it  would  put  U.S.  producers  of  goods  and  services  at  a  competitive  disadvantage  vis-k-vis 
foreign-owned  companies  selling  goods  in  tiie  United  States.  Virtually  all  of  our  trading  partners 
provide  a  deduction  for  advertising.  Therefore,  for  U.S.-owned  firms  the  cost  of  advertising  their 
products  will  be  higher  than  it  is  for  foreign-owned  firms. 

Pistgrtion  of  Pusiness  Practices 

If,  as  proposed,  the  current  deductibility  of  advertising  were  limited,  businesses  likely  would  shift 
their  marketing  activities  from  tiiose  falling  under  the  new  tax  definition  of  "advertising"  to  other 
similar  activities.  For  example,  in  response  to  this  new  tax  penalty,  a  business  might  reduce 
spending  on  "conventional"  advertising  and  instead  increase  the  size  of  its  sales  force  or  increase 
its  direct  mail  solicitation  even  though  these  methods  may  not  be  the  most  effective  means  of 
promoting  its  product  Thus,  purely  in  response  to  a  change  in  the  tax  law,  resources  would  be 
diverted  from  their  most  efficient  uses. 


4  See,  for  example,  Benham,  "The  Effect  of  Advertising  on  the  Price  Of  Eyeglass, "  Journal  of 
l.awanHFxonomics.  Vol..  15  (1972),  p.337. 


1170 


Those  businesses  that  rely  heavily  on  tax-disadvantaged  advertising  would  be  at  a  competitive 
disadvantage.  For  example,  a  clothing  retailer  that  relies  on  conventional  print  advertising  would 
be  put  at  a  competitive  disadvantage  with  a  clothing  mail-order  cataloger  who  relies  entirely  upon 
mailing  to  market  its  product. 

Similarly,  those  businesses  that  rely  heavily  on  providing  tax-disadvantaged  advertising  would  be 
at  competitive  disadvantage.  For  example,  television  stations  and  newspapers  would  suffer  at  the 
expenses  of  firms  that  perform  promotions  and  phone  solicitation. 

Revenue 

This  Subcommittee  is  currently  considering  a  proposal  to  capitalize  and  amortize  a  portion  of 
advertising  expenses  in  order  to  raise  revenue.  However,  behavioral  responses  to  the  proposal 
will  eliminate  a  significant  portion  of  the  anticipated  revenue  gain  as  businesses  seek  other  means 
to  market  their  goods  and  services.  However,  even  if  a  relatively  small  amount  of  revenue  were 
collected,  the  overall  burden  on  the  users  and  providers  of  advertising  would  still  be  large. 

Conclusion 

ThCTe  is  no  policy  justification  for  further  limiting  the  deductibility  of  advertising  beyond  the 
limitations  set  by  present  law.  Enactment  of  any  such  proposal  would  create  a  barrier  to 
expansion  of  markets  for  goods  and  services,  thereby  impeding  economic  growth  at  a  point  in 
time  when  economic  growth  is  desperately  needed.  In  addition,  such  a  proposal  would  reduce 
competition  by  restricting  information  flow  and  impeding  the  ability  of  new  entrants  to  challenge 
established  firms.  It  would  also  add  substantial  complexity  to  current  tax  rules. 


1171 

Mr.  KoPETSKi.  Our  next  witness  is  Mark  McConaghy,  former 
Chief  of  Staff  of  the  Joint  Committee  on  Taxation,  presently  the 
Managing  Partner  of  the  Washington  National  Tax  Services,  Price 
Waterhouse  Corp.  here  in  Washington,  D.C.  Welcome  back  to  this 
committee. 

STATEMENT  OF  MARK  MCCONAGHY,  MANAGING  PARTNER, 
WASHINGTON  NATIONAL  TAX  SERVICES,  PRICE 
WATERHOUSE,  WASHINGTON,  D.C,  ON  BEHALF  OF  AD  HOC 
GROUP  TO  PRESERVE  DEDUCTION  FOR  ADVERTISING 

Mr.  McCoNAGHY.  Thank  you,  Mr.  Chairman.  I  appreciate  the  op- 
portunity to  appear  before  the  subcommittee  today  to  discuss  the 
tax  policy  issues  relating  to  advertising  expenses.  I  am  testifying 
today  on  behalf  of  a  coalition  of  companies  with  a  common  goal  of 
retaining  the  current  tax  treatment  of  advertising  expenses. 

As  you  know,  before  the  subcommittee  is  a  proposal  to  limit  the 
current  business  deduction  for  advertising  expenses  as  a  part  of  a 
number  of  revenue-raising  proposals.  Such  proposals  are  not  new. 
They  have  been  considered  in  the  past  by  the  Ways  and  Means 
Committee  and  the  Senate  Finance  Committee.  For  a  number  of 
good  reasons.  Congress  has  declined  to  make  changes  in  this  area 
of  the  tax  law. 

I  would  like  to  focus  today  on  several  issues  relating  to  the  tax 
treatment  of  advertising  expenses  that  demonstrate  why  Congress 
should  continue  to  permit  the  current  deduction.  These  issues  are 
the  status  of  the  law  and  policy  issues  relating  to  the  treatment  of 
current  versus  capital  expenditures,  the  financial  statement  treat- 
ment of  advertising  expenses,  and,  finally,  the  administrative  com- 
plexity that  would  be  added  to  the  tax  law  if  such  proposals  were 
enacted. 

Advertising  is  an  ordinary  necessary  business  expense  permitted 
as  a  deduction  imder  section  162  of  the  Internal  Revenue  Code. 

The  allowance  of  that  deduction  reflects  the  net  income  concept 
underlying  the  U.S.  income  tax  system.  Under  a  net  income  con- 
cept, all  expenditures  that  are  not  contrary  to  public  policy  should 
be  recognized  either  as  a  current  deduction  or  a  future  deduction 
through  depreciation  or  amortization.  To  determine  when  the  ex- 
penditure is  recognized,  one  must  satisfy  two  concerns;  that  the  ex- 
penditure be  recognized  at  approximately  the  same  time  as  the  rev- 
enue to  which  it  relates  is  recognized  and  that  the  items  only  be 
recognized  when  they  can  be  measured  with  reasonable  certainty. 
Generally  an  expenditure  should  be  allowed  as  a  deduction  unless 
it  creates  some  measurable  future  benefit. 

The  fact  is  that  most  advertising  expenses  are  associated  with 
current  income.  For  example,  advertising  is  used  to  notify  consum- 
ers of  current  prices,  provide  information  about  new  models,  pro- 
vide industrial  customers  with  product  specifications,  and  direct 
consumers  to  retailers  who  stock  the  product.  To  limit  the  current 
deduction  of  the  cost  of  a  real  estate  listing  or  a  supermarket  ad- 
vertisement in  today's  newspaper  on  the  grounds  that  some  portion 
of  the  advertising  may  be  related  to  a  future  year's  income  is  just 
not  fair. 

To  go  down  the  road  suggested  by  the  proposal  before  the  sub- 
committee today  would  suggest  that  a  portion  of  all  of  our  salaries 


1172 

should  be  capitalized  to  reflect  the  fact  that  every  working  experi- 
ence we  encounter  in  our  jobs  will  train  us  for  future  workplace  ex- 
periences. Similarly,  such  an  argument  might  require  capitalization 
for  expenditures  relating  to  the  preparation  of  a  corporation's  fi- 
nancial statement,  a  portion  of  a  marketing  director's  salary  or  the 
costs  associated  with  a  corporate  strategic  planning  department 
since  these  expenditures  may  produce  some  future  benefit  to  the 
corporation. 

To  single  out  advertising  costs  from  other  period  costs  that  are 
currently  deductible  does  not  represent  sound  tax  policy.  Moreover, 
any  lines  that  are  drawn  between  advertising  costs  and  other  cor- 
porate expenditures  will  give  an  advantage  to  certain  approaches 
to  marketing  as  compared  to  others.  It  is  for  these  reasons  that  the 
financial  accounting  principles  have  required  that  advertising  be 
deducted  currently  and  have  allowed  the  capitalization  of  advertis- 
ing expenses  only  in  very  limited  circumstances. 

This  position  has  recently  been  reviewed  and  affirmed  by  the  fi- 
nancial accountants  in  the  AICPA  and  accepted  and  cleared  for 
final  issuance  by  the  Financial  Standards  Accounting  Board. 

The  AICPA  concluded  that  capitalizing  advertising  expenses  gen- 
erally should  not  be  permitted  due  to  tne  difficulty  in  identifying 
and  isolating  future  benefits  that  arise  from  those  expenditures. 
While  the  tax  and  financial  statement  treatment  of  an  expense  do 
not  necessarily  have  to  be  the  same,  in  the  case  of  advertising  a 
common  issue  drives  both  tax  and  accounting  treatment.  It  is  sim- 
plv  too  difficult  to  identify  and  measure  the  asset  that  is  produced 
when  expenditures  are  made  on  advertising. 

Current  tax  law  already  addresses  instances  where  the  future 
benefit  of  advertising  expenses  extend  significantly  beyond  the  pe- 
riod in  which  the  expenditures  are  incurred.  In  such  cases,  adver- 
tising expenses  are  capitalized. 

Finally,  distinguishing  those  advertising  expenses  for  which  a  de- 
duction would  not  currently  be  allowed  would  create  administrative 
nightmares  for  both  the  IRS  and  taxpayers.  Even  if  Congress  were 
to  limit  the  current  deductibility  to  an  arbitrary  percentage,  the 
IRS  and  taxpayers  would  still  be  thrown  into  endless  controversies 
over  resolving  which  marketing  and  other  expenditures  would  con- 
tinue to  be  deducted  currently. 

What  would  be  the  treatment,  for  example,  of  product  inventory 
discounts,  or  giveaway  promotions  that  are  utilized  to  launch  a 
product?  What  about  the  sponsorship  of  public  events,  the  prepara- 
tion of  point  of  sale  materials  such  as  brochures,  or  something  as 
simple  and  basic  as  printing  business  cards?  The  list  goes  on  and 
on  and  the  definitional  issues  would  be  tremendous. 

Any  limitation  on  the  deductibility  of  advertising  expenses  would 
require  that  rules  and  tests  be  established  for  all  these  activities 
and  expenditures  which  are  generally  deductible  under  present 
law.  It  would  be  extremely  difficult  for  the  IRS  to  write  and  admin- 
ister any  rules  that  distinguish  between  these  costs. 

In  summary,  I  would  like  to  thank  the  subcommittee  for  permit- 
ting me  the  opportunity  to  testify  on  this  issue  today.  Furthermore, 
I  would  like  to  urge  the  subcommittee  to  continue  to  heed  the  prin- 
ciples of  tax  reform  and  simplification  as  it  considers  revenue-rais- 
ing proposals.  Proposals  requiring  a  portion  of  advertising  costs  to 


1173 

be  capitalized  run  counter  to  those  principles  by  needlessly  com- 
plicating the  tax  law  and  wasting  precious  Government  and  tax- 
payer resources  on  litigation  and  record  keeping. 

Mr.  Chairman,  I  would  like  permission  to  submit  a  written  state- 
ment for  the  hearing  record  and  would  be  pleased  to  answer  ques- 
tions. 

Mr.  Payne  [presiding].  Without  objection,  so  ordered,  and  thank 
you  for  your  testimony. 

[The  prepared  statement  follows:] 


1174 


STATEMENT  OF  MARK  McCONAGHY 
AD  HOC  GROUP  TO  PRESERVE  THE  DEDUCTION  FOR  ADVERTISING 

I.    SUMMARY 

My  name  is  Mark  McConaghy  and  I  am  the  managing  partner  of  Price  Waterhouse's 
Washington  National  Tax  Services  office.   I  appreciate  the  opportunity  to  appear  before  the 
subcommittee  today  to  discuss  the  tax  and  financial  accounting  issues  relating  to  advertising 


I  am  testifying  today  on  behalf  of  a  coalition  of  companies  and  trade  associations  with  the 
common  goal  of  retaining  the  current  tax  treatment  of  advertising  expenses.  A  list  of  the 
members  of  the  coalition  is  included  at  the  end  of  this  testimony. 

As  you  know,  before  the  subcommittee  is  a  proposal  to  limit  the  current  business  deduction 
for  advertising  expenses  as  one  of  a  number  of  miscellaneous  revenue-raising  proposals. 
Such  proposals  are  not  new;  they  have  been  considered  in  the  past  by  both  the  House  Ways 
and  Means  Committee  and  the  Senate  Finance  Committee. 

For  a  number  of  sound  reasons,  Congress  has  declined  to  make  changes  in  this  area  of  the 
tax  law.   I  would  like  to  focus  today  on  several  issues  relating  to  the  tax  treatment  of 
advertising  expoises  that  demonstrate  why  Congress  should  continue  to  permit  the  current 
deduction.  These  are  as  follows: 

•  The  policy  issues  relating  to  the  treatment  of  current  versus  cs^ital  expenditures. 

•  The  &iancial  accounting  treatment  of  advertising  expoises. 

•  The  administrative  complexity  that  would  be  added  to  the  tax  law  if  such  proposals 
were  enacted. 


n.  BACKGROUND  AND  TAX  POUCY  ISSUES 

Matching  and  Measurability 

Advertising  is  an  ordinary  and  necessary  business  expense  permitted  as  a  deduction  under 
Internal  Revenue  Code  Section  162(a).  The  allowance  of  the  deduction  reflects  the  net 
income  concq)t  underlying  the  U.S.  income  tax  system. 

Under  a  net  income  concq>t,  all  ordinary  and  necessary  business  expenditures  (not  contrary 
to  public  policy)  should  be  recognized  either  as  a  current  deduction  or  as  a  future  deduction, 
through  depreciation  or  amortization.   To  determine  when  the  expenditure  is  recognized,  one 
must  satisfy  two  tax  policy  concerns  that  permeate  our  income  tax  system  -  the  need  to 
match  deductions  and  income,  and  the  practical  requirement  that  items  of  income  and 
expense  be  recognized  when  they  can  be  accurately  measured. 

The  matching  of  income  and  expenditures  results  in  a  more  accurate  calculation  of  net 
income.  Thus,  expenditures  generally  are  required  to  be  c^italized  -  and  amortized  and 
deducted  over  a  period  -  if  they  produce  significant  income  over  a  period  that  is  longer  than 
one  year.  The  accurate  calculation  of  net  income  also  requires  that  items  be  recognized 
when  they  can  accurately  be  measured.   Requiring  an  expenditure  to  be  capitalized  where  the 
future  benefit  to  be  derived  from  the  expenditure  is  merely  speculative  does  not  accurately 
measure  income.   Generally,  an  expenditure  is  and  should  be  allowed  as  a  current  deduction 
unless  it  creates  a  measurable  future  benefit. 

The  fact  is  that  advertising  expenses  are  associated  with  current  income.   For  example, 
advertisements  are  used  to  notify  consumers  of  current  prices,  provide  information  about  new 
models,  provide  industrial  customers  with  product  specification,  and  direct  consumers  to 
retailers  who  stock  the  product.   To  limit  the  current  deduction  of  the  cost  of  a  real  estate 
listing  or  a  supermarket's  advertisement  in  today's  newspiq>er  on  grounds  that  some  portion 
of  the  advertising  may  be  related  to  a  future  year's  income  is  clearly  unfoir.    It  is  extremely 


1175 


difficult  to  identify  the  benefits  of  advertising  that  stretch  beyond  a  relatively  short  period  of 
time.   If  it  is  possible  that  some  future  benefit  may  be  derived  from  advertising,  that  future 
benefit  is  neither  demonstrable  nor  suscq)tible  to  measurement. 

It  is  also  important  to  recognize  that  advertising  expenses  generally  represait  a  risky 
investment.   No  one  knows  whether  a  new  ad  campaign  will  be  successful  or  how  long  the 
effects  of  advertising  will  last. 

Large  corporations  that  undertake  so-called  goodwill  or  institutional  advertising  to,  among 
other  things,  improve  consumer  recognition  of  the  company  and  its  products  generally  do  so 
on  a  regular  basis.   There  is  little  or  no  expectation  that  the  benefits  of  this  advertising  will 
last  for  a  significant  period  of  time.  It  is  extremely  unlikely  that  a  corporation  could 
measure  whether  institutional  advertising  produced  any  increase  in  sales  over  the  long  run. 
There  is  no  method  that  exists  for  identifying  and  measuring  those  lasting  benefits,  if  such 
benefits  do  in  fact  exist. 

In  many  respects,  advertising  expenditures  that  are  longer  lasting  are  similar  to  outlays  for 
research  and  developm«it.   They  may  produce  income  in  future  years,  but  the  amount  and 
duration  of  those  returns  are  very  uncertain.   Congress  has  continued  to  reaffirm  the  current 
deductibility  of  research  and  developmental  expenditures.    Congress  has  done  so  not  only  as 
an  incentive  but  also  in  recognition  of  the  fact  that  requiring  the  capitalization  of  such 
expenditures  would  create  difficult  administrative  problems  and  would  not  necessarily 
produce  a  better  measure  of  net  income. 

The  proposal  before  the  committee  to  limit  the  current  deduction  for  a  portion  of  advertising 
expenditures  supposes  the  use  of  an  arbitrary  capitalization  rule  that  is  not  designed  to 
accurately  measure  net  income.   For  example,  if  it  were  assumed  that  virtually  all 
companies'  advertising  provides  no  future  benefit,  any  average  capitalization  rate  would 
mismeasure  the  net  income  of  those  companies.     The  average  capitalization  rate  would  also 
not  be  correct  for  the  very  small  percentage  of  companies  whose  advertising  was  presumed  to 
provide  a  future  benefit.  Thus,  such  an  approach  can  never  adequately  or  accurately  match 
income  and  deductions.   It  would  be  inaccurate  for  virtually  all  taxpayers. 

Copparison  with  othgr  pgriod  costs 

Treating  a  portion  of  advertising  costs  as  a  capitalizable  item  would  set  a  very  disturbing 
precedent.   It  would  suggest  that  a  portion  of  any  ordinary  and  necessary  business 
expenditure  could  be  capitalized  if  it  includes  a  component  that  produces  a  speculative  future 
benefit. 

In  performing  our  jobs,  each  of  us  learns  how  to  perform  the  job  better.   Every  working 
experience  we  encounter  in  our  jobs  trains  us  to  handle  future  work  place  experiences.   Yet 
few  would  suggest  that  an  arbitrary  portion  of  each  of  our  wages  should  be  capitalized  in 
order  to  reflect  that  potential  future  benefit  to  our  employers. 

Similarly,  it  could  be  argued  that  expenditures  relating  to  the  preparation  of  a  corporation's 
financial  statement  or  the  costs  associated  with  a  corporate  strategic  planning  department  will 
produce  some  future  benefit  to  the  corporation,  and  thus  should  be  c^italized.   There  is  also 
a  future  benefit  in  making  expaiditures  to  ensure  that  a  company  is  complying  with  federal 
and  state  regulations.  Yet,  in  none  of  these  cases  is  capitalization  appropriate  or  desirable 
because  the  future  benefit  is  speculative  and  uncertain. 

To  single  out  advertising  costs  from  other  period  costs  that  are  currently  deductible  simply 
does  not  represent  sound  tax  policy.    Moreover,  any  lines  that  are  drawn  between 
advertising  costs  and  other  corporate  expenses  will  give  an  advantage  to  certain  ^proaches 
to  marketing  as  compared  to  others.   For  example,  retailers  that  must  advertise  on  a  regu'ir, 
weekly  basis  in  order  to  bring  consumers  into  their  stores  would  be  disadvantaged  by  the 
proposal. 


1176 


Current  Tax  Law  Adequately  Addresses  Future  Benefits 

Current  tax  law  already  addresses  instances  where  the  future  benefit  of  advertising 
expenditures  extends  significantly  beyond  the  period  in  which  the  expenditures  are  incurred. 
In  such  cases,  advertising  expenditures  are  capitalized. 

For  example,  where  advertising  expenditures  are  incurred  in  connection  with  placing 
depreciable  property  in  service,  the  advertising  costs  must  be  capitalized  into  the  cost  of  the 
property.   Thus,  in  Cleveland  Electric  Dluminating  Co.  v.  U.S..  7  CI.  Ct.  220  (1985), 
advertising  expenditures  made  by  a  utility  to  ease  the  public's  fear  of  nuclear  power  related 
to  the  construction  of  a  nuclear  power  plant  were  required  to  be  recovered  as  the  plant  was 
depreciated. 

Advertising  expenditures  that  result  in  identifiable  tangible  assets  with  useful  lives,  such  as 
the  purchase  of  a  blimp,  are  currently  required  to  be  capitalized  for  Federal  income  tax 
purposes.   Expenditures  that  result  in  identifiable  intangible  assets  that  will  be  used 
repeatedly  in  future  advertising  campaigns  must  also  be  capitalized. 

There  are  other  examples  where  the  law  clearly  provides  for  the  capitalization  of  large,  one- 
time expenditures  associated  with  the  creation  of  a  tangible  or  intangible  asset  with  a  life  that 
extends  beyond  one  year.   In  each  of  these  situations  an  asset  that  could  be  exploited  for 
future  benefit  had  clearly  been  brought  into  existence.   On  the  other  hand,  the  more  common 
types  of  advertising  do  not  generate  such  an  asset.   In  the  absence  of  the  generation  of  an 
asset  that  will  demonstrably  contribute  to  a  future  income  stream,  a  current  deduction  is 
appropriate. 


in.      FINANCIAL  ACCOUNTING  ISSUES 

The  inability  to  establish  and  measure  the  future  economic  benefit  of  advertising  is  the 
primary  reason  that  financial  accounting  principles  have  required  almost  all  advertising  to  be 
expensed  currently,  and  has  allowed  capitalization  in  only  very  limited  circumstances. 

The  American  Institute  of  Certified  Public  Accountants  recently  J^jproved  a  Statement  of 
Position  (SOP)  entitled,  "Reporting  on  Advertising  Costs"  that  was  prepared  by  its 
Accounting  Standards  Executive  Committee  (AcSEC).  The  SOP  was  approved  and  cleared 
for  final  issuance  by  the  Financial  Accounting  Standards  Board  (FASB)  on  June  10,  1993. 
Accordingly,  the  SOP  may  be  considered  an  explanation  of  the  application  of  generally 
accepted  accounting  principles. 

The  SOP  requires  that  the  costs  of  advertising  be  expensed  on  a  company's  financial 
statements  either  as  incurred  or  as  of  the  first  time  the  advertising  takes  place,  unless  the 
advertising  is  direct-response  advertising  that  results  in  probable  future  economic  benefits  or 
results  in  the  acquisition  or  creation  of  a  tangible  asset  with  use  beyond  the  current 
advertising  campaign  (such  as  the  above-noted  blimp). 

In  preparing  the  SOP,  the  AcSEC  rejected  the  notion  that  advertising  costs  that  are  not 
related  to  tangible  assets  ~  other  than  direct-response  advertising  expenditures  -  be 
c^italized  because  "future  benefits  beyond  the  first  time  the  advertising  takes  place  are  too 
uncertain  and  are  not  demonstrable  or  measurable  with  the  degree  of  precision  required  to 
recognize  an  asset." 

The  AcSEC  concluded  that  the  ability  to  identify  and  isolate  future  benefits  has  improved 
because  of  greater  sophistication  of  data-gathering  and  analysis,  based  on  econometiic  models 
and  scanner  studies.   However,  the  AcSEC  maintained  that  most  advertising  should  be 
expensed  and  that  capitalization  of  most  advertising  should  be  prohibited  because  the  benefits 
are  not  measurable  "with  the  degree  of  precision  required  to  report  an  item  in  the  financial 
statements." 


1177 


The  financial  accounting  and  tax  treatment  of  particular  business  expenditures  do  not 
necessarily  have  to  be  the  same.   In  fact,  the  financial  accounting  treatment  of  advertising 
costs  should  be  only  one  factor  taken  into  account  in  determining  the  tax  accounting 
treatment  of  such  costs.   However,  the  theory  behind  capitalization  for  both  financial  and  tax 
accounting  principles  is  the  same  --  that  the  period  in  which  expenses  are  deducted  should 
match  the  period  in  which  the  income  generating  those  expenses  was  earned.   In  general,  for 
both  tax  and  financial  accounting  purposes,  advertising  costs  match  income  earned  in  the 
current  year. 

Direct  Response  Advertising 

The  AcSEC  determined  that  the  only  exception  to  the  concept  that  advertising  be  expensed 
for  financial  accounting  purposes  should  be  in  the  case  of  direct-response  advertising. 
Direct-response  advertising  is  advertising  that  is  expected  to  result  in  a  decision  to  buy  an 
entity's  products  or  sovices  by  customers  who  can  be  shown  to  have  responded  specifically 
to  the  advertising.   In  order  to  sustain  such  a  showing,  documentation  demonstrating  the 
customer  has  responded  to  a  specific  advertisement  is  required.   Where  capitalization  of 
direct-response  advertising  is  allowed  by  the  SOP,  it  is  expected  that  the  period  over  which 
the  benefits  of  direct-response  advertising  are  amortized  would  usually  be  short. 


IV.       ISSUES  OF  ADMINISTERABILITY  AND  COMPLEXITY 

Distinguishing  those  advertising  expenditures  for  which  a  deduction  would  not  be  currently 
allowed  would  create  administrative  nightmares  for  both  the  IRS  and  taxpayers.   Even  if 
Congress  were  to  limit  the  current  deductibility  to  an  arbitrary  percentage,  the  IRS  and 
taxpayers  would  still  be  thrown  into  endless  controversies  over  resolving  which  marketing 
and  other  expenditures  would  continue  to  be  deductible  currently. 

Direct  payments  to  the  media  for  placing  advertisements  may  more  easily  fall  within  a 
simplified  definition  of  advertising.   However,  the  line  between  direct  advertising 
expenditures  and  other  product  marketing  costs  is  very  difficult  to  draw.     What  would  be  the 
treatment,  for  example  of  product  introductory  discounts,  or  even  giveaway  promotions  that 
are  utilized  to  launch  a  product?   What  about  the  sponsorship  of  public  events,  the 
preparation  of  point-of-sale  materials,  such  as  brochures,  or  something  as  simple  and  basic  as 
printing  business  cards?  The  list  goes  on  and  on. 

Such  a  proposal  would  require  additional  recordkeeping  to  c^ture  costs  for  a  category  of 
business  expense  arbitrarily  carved  out  from  other  ordinary  and  necessary  business  costs. 
Taxpayers  probably  would  be  required  to  maintain  records  of  their  advertising  and  other 
marketing  expenses  for  lengthy  periods.   Moreover,  the  discrq)ancy  between  financial  and 
tax  accounting  that  would  be  created  under  the  proposal  would  require  taxpayers  to  create 
new  reconciliations  of  these  differences  to  be  accounted  for  on  Form  1 120.    While 
businesses  identify  "advertising  costs"  on  their  tax  returns  now,  most  businesses  do  not 
undertake  the  recordkeqring  necessary  to  distinguish  advertising  from  promotional  costs,  or 
to  allocate  payroll  to  reflect  time  an  employee  may  spend  in  reviewing  an  advertising 
campaign,  for  example. 

Any  limitation  on  the  deductibility  of  advertising  expenditures  would  require  that  rules  and 
tests  be  established  for  all  these  activities,  the  expenditures  for  which  generally  are  deductible 
under  current  law.   It  would  be  extremely  difficult  for  the  IRS  to  write  and  administer  any 
rules  that  distinguish  between  these  costs. 


V.        REVENUE  CONSIDERATIONS 

A  principal  reason  for  proposals  to  limit  the  current  deduction  for  advertising  have 
traditionally  been  the  revenue  that  such  proposals  would  generate.   It  is  not  sound  tax  policy 
to  adopt  rules  that  result  in  the  mismeasurement  of  net  income  solely  to  raise  revenue. 


1178 


It  should  also  be  noted  that  a  proposal  to  require  capitalization  and  amortization  of  some  or 
all  advertising  expenditures  is  a  timing  issue,  not  an  issue  of  reducing  total  deductions 
permitted  to  the  taxpayer.   Deferral  of  advertising  deductions  could  increase  revenue  initially 
through  a  substantial  one-time  effect,  but  would  otherwise  raise  only  modest  additional 
revenue  in  later  years.   Thus,  any  five-year  revenue  estimate  would  greatly  overstate  the 
long-run  revenue  effect  of  such  proposals. 


VI.      CONCLUSION 

Congress  in  general,  and  this  subcommittee  in  particular,  should  reject  any  proposal  to 
capitalize  a  portion  of  advertising  expenses.   Such  a  proposal  would  result  in  less  accurate 
measurement  of  net  income,  would  deviate  firom  well-established  principles  of  financial 
accounting,  and  would  create  new  and  unnecessary  compliance  burdens  for  taxpayers  as  well 
as  increase  the  administrative  burden  on  the  IRS.  While  such  a  proposal  would  raise  some 
"one-time"  revenue,  it  would  do  so  at  the  cost  of  permanent  inaccuracies  in  the  measurement 
of  net  income  and  permanent  inefficiencies  in  the  administration  of  the  tax  system. 


Ad  Hoc  Group  to  Preserve  the  Deduction  for  Advertising 

Borden,  Inc. 

Campbell  Soup  Company 

E.I.  Du  Pont  De  Nemours  and  Company 

Eastman  Kodak  Company 

General  Mills,  Inc. 

General  Motors  Corporation 

Goodyear  Tire  &  Rubber  Company 

Hallmark  Cards,  Inc. 

Hasbro,  Inc. 

Hewlett-Packard  Company 

Kellogg  Company 

Merck  &  Co.,  Inc. 

NATIONAL  ASSOCL^TION  OF  REALTORS* 

NKE,  Inc. 

NYNEX  Corporation 

Owens-Coming 

PepsiCo,  Inc. 

Pillsbury 

Sara  Lee  Corporation 


1179 

Mr,  Payne.  Our  last  witness  of  this  panel  represents  the  Adver- 
tising Tax  Coalition,  Timothy  White,  who  is  a  publisher  of  Times 
Union,  Albany,  N.Y.;  and  my  good  friend  DeWitt  Helm,  the  presi- 
dent of  the  Association  of  National  Advertisers,  New  York,  N.Y. 
DeWitt  and  I  were  business  colleagues  in  Virginia.  We  never 
thought  at  that  time  we  would  be  seeing  each  other  in  this  setting. 
Welcome  to  the  Ways  and  Means  Committee. 

STATEMENT  OF  TIMOTHY  WHITE,  PUBLISHER,  TIMES  UNION, 
ALBANY,  N.Y^  ON  BEHALF  OF  THE  ADVERTISING  TAX  COALI- 
TION AND  THE  NEWSPAPER  ASSOCIATION  OF  AMERICA 

Mr,  White.  Thank  you  for  the  introduction.  In  addition  to  being 
publisher  of  the  Times  Union,  a  daily  newspaper  with  a  circulation 
of  103,000  dailv  and  a  Sunday  edition  of  160,000,  additionally  I  ap- 
pear on  behalf  of  the  Newspaper  Association  of  America  and  the 
Advertising  Tax  Coalition. 

The  Newspaper  Association  of  America  represents  approximately 
1,250  newspapers  in  the  United  States  and  Canada.  The  majority 
are  newspapers  that  account  for  more  than  80  percent  of  the  total 
dailv  circulation  in  the  United  States. 

The  Advertising  Tax  Coalition  consists  of  10  national  trade  asso- 
ciations of  which  the  newspaper  association  is  one  member. 

As  our  country  struggles  to  emerge  from  this  recession,  the  last 
thing  we  need  or  anyone  needs  is  a  reason  not  to  advertise.  Public 
policy  should  be  encouraging  manufacturers,  retailers  and  service 
providers  to  reach  out  to  new  customers  through  advertising  in  an 
effort  to  break  this  recession  and  to  get  the  economy  growing  again. 
A  tax  on  advertising  would  have  the  opposite  effect. 

The  present  law  treatment  of  advertising  costs  represents  sound 
tax  policy.  It  reflects  the  reality  that  the  cost  of  advertising  is  just 
as  essential  to  the  operation  of  a  business  as  the  salaries  of  its  em- 
ployees, the  rent  for  its  space  or  the  gasoline  for  the  cars  used  by 
the  sales  staff. 

It  is  impossible  to  distinguish  between  advertising  and  all  other 
marketing  expenses  or  promotion  and  sales  expenses.  Limiting  ad- 
vertising expense  deductibility  would  mean  that  sales  staff  meet- 
ings to  discuss  new  sales  techniques  would  be  fully  deductible,  but 
not  meetings  to  review  the  latest  ad  campaign. 

Another  reason  to  currently  deduct  the  cost  of  advertising  is  that 
it  is  an  expense  that  must  be  repeated  or  even  increased  from  year 
to  year,  reflecting  the  fact  that  advertising  does  not  stay  around  to 
create  ongoing  sales.  Buying  advertising  does  not  buy  an  asset  for 
a  company.  The  overwhelming  volume  of  newspaper  advertising  is 
designed  to  alert  the  reader  to  the  availability  of  a  certain  product 
or  service  at  a  certain  price  under  certain  conditions  and  most 
often  at  a  specific  time  and  location. 

Take  a  look  at  this  copy  of  last  Sunday's  edition  of  the  Times 
Union.  We  have  some  advertising  on  the  back  page  of  the  A  section 
by  Olender  Furniture  and  Sleep  Shop,  a  local  enterprise  promoting 
a  12-hour  Labor  Day  sale.  Just  inside  we  have  a  Filene's  Labor 
Day  clearance  sale,  and  on  page  2  an  optician  promoting  free  eye 
exams  to  returning  students. 

Where  is  the  residual  asset  value  for  the  retailers  whose  lifeblood 
is  promoting  tomorrow's  special  offer  on  a  gallon  of  milk,  a  Mercury 


1180 

Marquis  or  back  to  school  overalls?  Most  consumer  businesses,  es- 
pecially retailers,  have  two  things  in  common.  First,  they  already 
operate  on  razor  thin  profit  margins  and,  second,  advertising  ex- 
pense represents  a  significant  portion  of  their  total  operating  costs. 

Reduce  the  deductibility  of  those  advertising  expenses  and  you 
unfairly  pressure  an  already  stressed  sector  of  our  private  econ- 
omy. Two  Nobel  laureates  in  economics,  the  late  George  Stigler  and 
Dr.  Kenneth  Arrow,  wrote  a  paper  for  the  Advertising  Tax  Coali- 
tion stating  that  "Advertising  is  a  powerful  tool  of  competition.  It 
provides  valuable  information  about  products  and  services  in  an  ef- 
ficient and  cost-effective  manner.  In  this  way  advertising  helps  the 
economy  to  function  smoothly,  it  keeps  prices  low  and  facilitates 
the  entry  of  new  products  and  new  firms  into  the  marketplace." 

The  ads  in  this  edition  of  the  Times  Union  offer  our  readers  a 
potpourri  of  choices  between  vegetables  and  cuts  of  meat  at  com- 
peting grocery  stores,  new  automobiles  at  various  Albany  dealer- 
ships, or  new  jobs  with  employers  competing  for  a  variety  of  em- 
ployee skills.  Without  advertising,  consumers  would  have  to  search 
on  their  own  for  information  about  the  existence  and  identity  of 
sellers  and  the  prices  they  charge. 

Certainly  no  one  has  to  explain  to  a  newspaper  publisher  how 
dramatically  advertising  fosters  competition.  During  the  past  30 
years  our  country  has  witnessed  a  virtual  explosion  of  alternative 
information  sources  in  every  community  in  the  United  States.  In 
the  14-county  Albany  area  alone,  for  instance,  there  are  11  other 
dailv  newspapers,  four  local  network  affiliated  TV  stations,  20  net- 
work affiliated  radio  stations,  16  independent  radio  stations,  a 
cable  advertising  network  with  three  franchises  reaching  142,000 
homes,  6  outdoor  billboard  advertising  companies,  and  more  than 
48  weekly  community  newspapers  and  shoppers.  These  100+  media 
companies  together  with  direct  mail  and  yellow  pages  advertising 
compete  for  the  annual  $330  million  spent  in  this  relatively  small 
marketplace  alone. 

Since  more  than  80  percent  of  the  ad  dollars  spent  in  this  mar- 
ketplace are  spent  with  competitors  of  the  Times  Union,  I  am  re- 
minded daily  of  the  role  advertising  plays  in  stimulating  diversity 
and  competition  in  American  media. 

In  conclusion,  I  cannot  conceive  of  a  tax  proposal  that  more  vio- 
lates our  American  concept  of  fair  play  or  a  level  playing  field  than 
does  the  proposal  to  limit  the  current  deduction  for  advertising  ex- 
penses, nor  can  I  think  of  a  tax  proposal  that  is  more  counter- 
productive at  a  time  when  we  are  attempting  to  stimulate  our  na- 
tional and  local  economies. 

Mr.  Chairman,  this  subcommittee  has  a  challenging  task  to  meet 
the  revenue  needs  of  this  country,  and  I  appreciate  the  difficulty 
of  your  job.  Nevertheless,  we  believe  that  the  proposal  to  limit  the 
deductions  for  advertising  costs  would  be  unfair  and  anticompeti- 
tive and  would  only  contribute  to  slow  growth  or  no  growth  in  our 
economy.  We  strongly  urge  you  to  reject  this  proposal.  Thank  you. 

[The  prepared  statement  follows:] 


1181 


Statement  By  Tim  White 

On  BEHALF  Of 

THE  NEWSPAPER  ASSOCIATION  OF  AMERICA 

AND 

THE  ADVERTISING  TAX  COALITION 

BEFORE  THE 

SuBCOMMirrEE  ON  Select  Revenue  Measures 

COMMITTEE  on  WAYS  AND  MEANS 

u.s.  house  of  representatives 
Washington,  D.  C. 

September  8, 1993 


Mr.  Chairman,  and  Members  of  the  Subcommittee,  my  nsime  is  Tim  White, 
and  I  am  publisher  of  the  Times  Union  of  Albany,  New  York,  a  daily  newspaper 
with  a  circulation  of  106,000,  and  a  Sunday  edition  circulation  of  160,000.  I  am 
appearing  today  on  behalf  of  the  Newspaper  Association  of  America  (NAA)  and  the 
Advertising  Tax  Coalition,  of  which  NAA  is  a  member. 

The  Newspaper  Association  of  America  is  a  non-profit  trade  association 
representing  approximately  1,250  newspapers.  NAA  members  account  for  more 
than  80  percent  of  U.S.  daily  and  Sunday  newspaper  circulation.  Many  non-daily 
newspapers  also  are  members  of  NAA. 

The  Advertising  Tax  Coalition  consists  often  national  trade  associations, 
including  NAA.  The  other  members  of  the  Advertising  Tax  Coalition  include: 
American  Advertising  Federation,  the  American  Association  of  Advertising 
Agencies,  the  Association  of  National  Advertisers,  the  Direct  Marketing  Associatio 
the  Grocery  Manufacturers  of  America,  the  Magazine  Publishers  of  America,  the 
National  Association  of  Broadcasters,  the  National  Newspaper  Association,  and  thi 
Yellow  Pages  Publisher's  Association. 

As  our  country  struggles  to  emerge  from  this  recession,  the  last  thing  we 
need,  or  anyone  needs,  is  a  reason  not  to  advertise.  Public  policy  should  be 
encoxu-aging  manufacturers,  retailers,  and  service  providers  to  reach  out  to  new 
customers  through  advertising,  in  an  effort  to  break  this  recession,  and  to  get  the 
economy  growing  again.  A  tax  on  advertising  would  have  the  opposite  effect: 

First,  the  present  law  treatment  of  advertising  costs  represents  soxmd  tax 
pohcy.  It  reflects  the  reality  that  the  cost  of  advertising  is  indistinguishable  from 
£my  other  marketing  cost,  whether  for  direct  promotion,  point  of  sales  promotion, 
discoimt  promotions,  or  the  salaries  of  sales  personnel.  The  cost  of  advertising  is 
just  as  essential  to  the  operation  of  a  business  as  the  salaries  of  its  employees,  the 
rent  for  its  space,  or  the  gasoline  for  the  sales  staffs  cars. 

Second,  it  is  impossible  to  distinguish  between  advertising  and  all  other 
marketing  expenses,  or  promotion  and  sales  expenses.  Sales  staff  meetings  to 
discuss  new  sales  techniques  would  be  fully  deductible,  but  not  meetings  to  review 
the  latest  ad  campaign. 

Third,  another  reason  to  ciurently  deduct  the  cost  of  advertising  is  that  it 
represents  a  period  cost  —  the  amount  spent  on  it  must  be  repeated  or  increased 
from  year  to  year,  which  reflects  the  fact  that  advertising  does  not  stay  aroxmd  to 
create  ongoing  sales.  Buying  advertising  does  not  buy  an  asset  for  a  company.  Th< 
overwhelming  volume  of  newspaper  advertising  is  designed  to  alert  the  reader  to 
the  availability  of  a  certain  product  or  service,  at  a  certain  price,  vmder  certain 
conditions,  and  often  at  a  specific  location.  It  would  not  take  a  Times  Union  reade 
long  to  reach  that  conclusion  without  the  benefit  of  economic  research.  Just  take  a 
look  at  this  copy  of  last  Sunday's  edition  of  the  Times  Union  --  we  have  advertising 
for  Olender  Furniture  and  Sleep  Shop  ("91  Years  of  Good  Family  Business"), 
promoting  a  12-hour  Labor  Day  Sale.  We  have  Filene's  Labor  Day  Clearamce  Sale, 
and  on  Page  A2  we  have  an  ad  for  a  local  optician  offering  returning  students  free 
eye  exams. 


77-130  0 -94 -6 


1182 


Where  is  the  residual  asset  value  for  the  thoussuids  (no,  millions)  of  retailers 
whose  life-blood  is  promoting  tomorrow's  special  offer  on  a  gallon  of  milk,  a  Mercur 
Marquis,  or  back-to-school  overalls?  Most  consumer  businesses  -  and  especially 
retailers  --  have  two  things  in  common:  (1)  They  already  operate  on  razor- thin 
profit  margins,  and  (2)  Advertising  expense  represents  a  significant  portion  of  thei 
total  operating  costs.  Reduce  the  deductibihty  of  those  advertising  expenses  and 
you  unfairly  pressure  an  already-stressed  sector  of  our  private  economy. 

Two  Nobel  Laureates  in  economics,  the  late  Dr.  George  Stigler  auid  Dr. 
Kenneth  Arrow,  wrote  a  paper  for  the  Advertising  Tax  Coalition  which  states  that 
"advertising  is  a  powerful  tool  of  competition  ...  It  provides  valuable  information 
about  products  and  services  in  an  e£5cient  and  cost  effective  mainner.  In  this  way, 
advertising  helps  the  economy  to  function  smoothly  -  it  keeps  prices  low,  and 
facilitates  the  entry  of  new  products  emd  new  firms  into  the  market."  The  ads  in 
this  edition  of  the  Times  Union  offer  our  readers  a  potpourri  of  choices  between 
vegetables  and  cuts  of  meat  at  competing  grocery  stores,  new  automobiles  at  varioi 
Albany  dealerships,  or  new  jobs  with  employers  competing  for  a  vsuiety  of  employe 
skills.  Without  advertising,  consumers  woidd  have  to  search  on  their  own  for 
information  about  the  existence  and  identity  of  sellers,  and  the  prices  they  charge. 

As  any  daily  newspaper,  magazine,  broadcast  station,  or  other  advertising- 
supported  form  of  media  will  demonstrate,  advertising  makes  it  possible  for  reader 
and  viewers  to  have  access  to  a  range  of  information  and  entertainment  at  little  or 
no  cost,  which  makes  the  marketing  and  entertainment  segments  of  our  economy 
the  model  for  the  world. 

No  one  has  to  explain  to  a  newspaper  publisher  how  dramatically  advertisin 
fosters  competition.  During  the  past  30  years  our  country  has  witnessed  an 
explosion  of  alternative  information  sources  in  every  community  in  the  United 
States.  Recently,  my  local  phone  company  suggested  that  the  Times  Union  was  a 
non-competitive  monopoly  in  the  Albany  market. 

Let  me  describe  how  absurd  it  feels  to  be  described  by  my  NYNEX  colleague 
as  monopoUstic.  Markets  are  defined  today  by  the  television  industry  -  they  are 
called  Areas  of  Dominant  Influence  (ADI's).  In  the  14-County  Albany  ADI  there  ai 
11  other  daily  newspapers,  four  local  network-affiliated  TV  stations,  20  network- 
affiliated  radio  stations,  16  independent  radio  stations,  a  cable  advertising  networl 
representing  three  franchises  and  142,000  homes,  six  outdoor  billboard  advertising 
companies,  and  more  than  48  weekly  community  newspapers  and  shoppers. 

These  lOO-plus  media  compemies,  together  with  direct  mail  and  Yellow  Page 
advertising,  compete  for  the  annual  $330  miUion  spent  in  this  marketplace.  Over 
80  percent  of  the  ad  dollars  spent  in  this  marketplace  are  spent  with  competitors  o 
the  Times  Union.  In  fact,  three  out  of  five  newspaper  readers  read  something  othe 
than  the  Times  Union  each  weekday,  and  one-third  of  those  who  do  read  our  paper 
also  read  something  other  than  the  Times  Union  on  an  average  weekday. 

Advertising  also  is  indispensable  to  a  fi-ee  and  independent  press.  In  a 
statement  last  yeaur  on  the  floor  of  the  House  of  Representatives,  Ilep.  Michael  A. 
Andrews  described  advertising  as  ".  .  .  the  economic  engine  that  provides  the 
resources  necess£iry  for  the  media  to  supply  the  information  the  pubUc  needs  and 
wants.  Without  advertising,  media  would  become  a  State-run  enterprise  with  all 
the  constraints  and  burdens  that  entails." 

Washington  Post  columnist  Richard  Harwood  wrote  earUer  this  year  that 
"advertisers  and  the  media  need  each  other."  Companies  "advertise  out  of  necessit 
the  necessity  to  move  goods  in  a  competitive  international  economy  in  which  even 
the  biggest  players  .  .  .  are  insecure  and  struggling  to  survive,"  Harwood  observed. 
He  went  on  to  comment  that  advertising  ensured,  in  the  last  century,  the  economic 
independence  of  the  American  press  from  the  control  of  government  and  political 
parties. 

Advertising  provides  approximately  80  percent  of  the  gross  revenues  of 
newspapers,  with  the  remsdnder  derived  fi-om  subscription  income.  Most  of  the 
advertising  revenue  comes  fi-om  retail  and  service  industries,  which  are 
predominantly  local  businesses.  Thus,  it  is  the  advertising  that  maikes  it  possible 


1183 


for  newspapers,  radio,  television  and  magazines  to  present  a  diverse  offering  of 
news,  sports,  weather,  business,  lifestyle,  and  entertainment  information  at  a 
nominal  cost  to  the  consimier.  It  is  axiomatic  that  if  advertising  is  taxed,  and 
therefore  more  expensive,  advertisers  will  buy  less  of  it  and  there  will  be  less 
information  and  entertainment  in  the  media. 

Mr.  Chairman,  in  conclusion,  I  cannot  conceive  of  a  tax  proposal  that  more 
violates  our  American  concept  of  fair  play  or  a  level  playing  field  than  does  the 
proposal  to  limit  the  current  deduction  for  advertising  expenses.  Nor  can  I  think  o 
a  tax  proposal  that  is  more  counterproductive  at  a  time  when  we  are  attempting  to 
stimulate  our  national  and  local  economies.  A  limit  on  the  deduction  for  advertisir 
costs  would  depress  economic  activity  at  a  time  when  it  is  important  to  achieve 
productivity  and  efficiency  in  our  economy.  The  effect  would  be  to  increase  prices 
and  reduce  competition.  At  a  time  when  Americans  are  benefiting  more  and  more 
from  broader  sources  of  information  and  entertainment,  at  Uttle  or  no  cost  because 
of  its  advertising  support,  it  would  tend  to  shrink  the  number  of  these  multiple 
media  outlets.  And,  at  a  time  (in  1991)  when  daily  newspapers  have  experienced 
the  worst  advertising  revenues  since  World  War  II,  it  would  impose  a  further 
penalty  cost  on  our  advertising-dependent  industry. 

Mr.  Chairman,  this  Committee  has  a  challenging  task  to  meet  the  revenue 
needs  of  this  country,  and  we  appreciate  the  difficulty  of  your  job.  Nevertheless,  w 
believe  that  the  proposal  to  limit  the  deduction  for  advertising  costs  would  be 
unfair,  and  sinti-competitive,  and  would  only  contribute  to  slow  growth,  or  no 
growth  in  our  economy. 

We,  therefore,  strongly  urge  you  to  reject  this  proposal. 


1184 

Mr.  Payne.  Thank  you,  Mr.  White. 
Mr.  Helm. 

STATEMENT  OF  DEWITT  F.  HELM,  JR.,  PRESmENT,  ASSOCIA- 
TION OF  NATIONAL  ADVERTISERS,  INC.,  AND  ALSO  ON 
BEHALF  OF  THE  ADVERTISING  TAX  COALITION 

Mr.  Helm.  Thank  you,  Mr.  Chairman,  for  those  warm  words  of 
welcome. 

For  the  benefit  of  the  full  subcommittee,  my  name  is  DeWitt 
Helm,  and  before  becoming  president  of  the  Association  of  National 
Advertisers,  10  years  ago,  I  was  an  advertising  and  marketing  pro- 
fessional for  25  years  with  three  well-known  consumer  product 
companies.  I  appear  today  on  behalf  of  ANA  and  the  Advertising 
Tax  Coalition  in  strong  opposition  to  the  proposal  that  would  im- 
pose a  tax  on  advertising. 

ANA  represents  virtually  every  manufacturing  and  service  seg- 
ment of  industry.  Our  members  account  for  approximately  80  per- 
cent of  national  and  regional  advertising  expenditures,  and  the 
ATC  represents  10  national  trade  associations  whose  members  play 
a  dominant  role  in  advertising. 

All  of  the  members  of  our  coalition  strongly  urge  Congress  to  re- 
tain the  full  and  current  deductibility  of  advertising  expenses.  A 
tax  on  advertising^  would  severely  weaken  a  powerful  economic  en- 
gine that  creates  jobs,  produces  sales,  and  generates  profits. 

The  proposal  under  consideration  is  bad  public  policy  and  bad 
tax  policy.  It  would  damage  the  business  community,  throttle  the 
media,  and  stifle  the  efforts  to  invigorate  our  economy.  Any  limita- 
tion on  the  deductibility  of  advertising  would  make  advertising 
more  expensive  and,  like  the  Red  Queen  in  Alice  In  Wonderland, 
companies  would  have  to  run  faster  by  spending  more  on  advertis- 
ing each  year  merely  to  remain  in  the  same  place. 

A  decrease  in  advertising  will  translate  into  reduced  sales  and 
resonate  throughout  the  economy.  This  tax  would  not  only  damage 
the  country's  largest  advertisers  but  also  hundreds  of  thousands  of 
small  businesses  that  advertise;  every  drug  store,  grocery  store, 
general  store,  and  hardware  store  in  this  country  would  feel  the 
impact  directly. 

Proponents  of  limiting  the  advertising  tax  deduction  argue  that 
since  some  advertising  may  provide  benefits  for  longer  than  1  year, 
all  advertising  costs  should  not  be  taken  fully  in  the  year  incurred, 
but  most  advertising  is  directed  to  the  sale  of  a  particular  product 
or  service  in  a  veiy  limited  time  frame.  Advertising  for  super- 
market specials,  holiday  and  seasonal  promotions,  and  classified 
advertising  for  houses  and  job  openings  fill  the  spaces  of  our  na- 
tional and  local  media. 

In  1989  the  ATC  asked  the  late  Dr.  George  Stigler  of  the  Univer- 
sity of  Chicago  and  Dr.  Kenneth  Arrow  of  Stanford  University,  both 
winners  of  the  Nobel  Prize  in  economics,  to  carefully  examine  pro- 
posals to  change  the  tax  treatment  of  advertising,  and  after  com- 
prehensive analysis  they  concluded,  "We  do  not  believe  that  exist- 
ing economic  evidence  supports  proposed  changes  in  the  tax  treat- 
ment of  advertising." 

Now,  changing  the  tax  treatment  of  advertising  would  also  create 
an  enormous  administrative  burden  for  both  Government  and  busi- 


1185 

ness.  Advertising  simply  is  not  a  term  of  art.  It  does  not  have  any 
fixed  meaning.  Will  direct  mail  or  signs  in  retail  stores  be  consia- 
ered  advertismg?  Should  brand  or  company  logos  on  trucks  or  T- 
shirts  be  defined  as  advertising? 

Developing  working  definitions  will  be  complex,  time  consuming, 
and  impose  high  compliance  costs.  There  is  simply  no  business,  tax 
or  public  policy  purpose  served  by  singling  out  and  discriminating 
against  advertising  through  the  Tax  Code.  At  best,  our  Nation's 
economy  is  in  a  veiy  sensitive  phase,  and  it  would  take  very  little 
to  throw  it  into  a  tailspin. 

The  incentive  for  American  business  simply  should  and  must  be 
to  produce  more  profits,  profits  that  will  put  people  back  to  work. 
Let  advertising  do  its  job  by  driving  the  economic  engine  that  cre- 
ates sales,  profit,  and  employment. 

In  conclusion,  one  Member  of  Congress  recently  told  a  group  of 
advertising  and  media  executives  that  trying  to  sell  a  product  or 
service  without  advertising  would  be  like  a  bird  trying  to  fly  with- 
out wings,  and  that  metaphor  captures  better  than  most  the  mes- 
sage I  hope  to  leave  with  this  subcommittee  today. 

Advertising  permits  the  consumer  to  make  an  informed  choice 
from  a  range  of  options.  I  urge  you  not  to  clip  its  wings  but  to  let 
advertising  carry  its  message  without  an  additional  burden  that 
would  impede  it  from  realizing  its  goal. 

Thank  you  very  much. 

[The  prepared  statement  follows:] 


1186 


Statement  By 

DeWittF.  Helm,  JR. 

On  Behalf  Of 

The  association  of  National  advertisers 

And 

The  Advertising  Tax  Coalition 

Before  The 

Subcommittee  On  Select  Revenue  Measures 

Committee  On  Ways  And  Means 

U.S.  House  of  representatives 

Washington,  D.C. 

September  8, 1993 


Mr.  Chairman,  and  members  of  the  Subcommittee:  Good  morning.  My 
name  is  DeWitt  F.  Hehn,  Jr.  Before  becoming  President  of  the  Association  of 
National  Advertisers,  Inc.  (A.N.A.)  ten  years  ago,  I  was  President  of  the  Miller- 
Morton  Company,  then  the  consumer  products  subsidiary  of  a  prominent 
multinational  diversified  pharmaceutical  company.  Previously,  I  also  served  as  an 
advertising  and  marketing  executive  at  Richardson- Vicks  (now  a  part  of  Procter 
and  Gamble)  and  Pfizer,  Inc. 

I  am  appearing  today  on  behalf  of  A.N  A  and  the  Advertising  Tax  Coalition 
in  strong  opposition  to  a  proposal  that  would  impose  a  tax  burden  on  advertising. 
This  proposal  is  both  bad  public  poUcy  and  bad  tax  poUcy  because  it  would  damage 
the  business  conmmnity;  severely  harm  the  media;  and  adversely  impact  efforts  to 
invigorate  the  economy. 

A.N.A.  represents  virtually  every  segment  of  the  business  commimity.  Our 
broad  corporate  membership  includes,  within  its  entities,  over  2,000  8ubsi(fiaries, 
divisions,  and  operating  units  located  throughout  the  United  States.  Our 
members  market  a  vast  range  of  products  and  services  smd  employ  advertising  as 
an  important  element  of  their  selling  and  pubUc  relations  programs.  A.N.A.'s 
members  collectively  account  for  approximately  80%  of  all  national  and  regional 
advertising  expenditures  in  the  United  States.  Although  A.N.A.'8  membership 
includes  most  of  the  nation's  largest  advertisers,  it  also  includes  many  smaller 
companies.  A  nimiber  of  oiir  members,  for  example,  spend  under  5  miiUion  dollars 
annually  for  advertising. 

The  ATC  includes,  in  addition  to  our  association,  the  American  Advertising 
Federation,  the  American  Association  of  Advertising  Agencies,  the  Direct 
Marketing  Association,  the  Grocery  Manufacturers  of  America,  the  Magazine 
Publishers  of  America,  the  National  Association  of  Broadcasters,  the  National 
Newspaper  Association,  the  Newspaper  Association  of  America,  and  the  Yellow 
Pages  Publisher's  Association.  Together,  the  members  of  these  organizations  play 
a  dominant  role  in  preparing  and  pubUshing  or  broadcasting  the  advertising 
produced  in  this  coimtry. 

All  the  members  of  our  Coalition  strongly  urge  that  Congress  retjun  the  full 
and  current  deductibility  of  advertising  expenses.  The  full  tax  deductibihty  of 
advertising  expenses  provides  enormous  benefits  to  our  nation's  economy. 
Advertising  generates  the  sales  that  lead  to  corporate  profitability  ~  it  is  the  most 
efficient  means  of  selling  ever  devised.  A  tax  burden  on  advertising  would 
severely  weaken  an  important  economic  engine  that  helps  to  create  jobs,  produce 
sales,  and  generate  corporate  profits. 

From  the  vantage  point  of  a  former  company  president,  and  an  advertising 
and  marketing  professional  with  over  thirty-five  years  of  real  world  experience,  I 
offer,  for  your  consideration,  my  perspective  of  the  likely  impact  of  the  advertising 
tax  proposal  on  the  advertising  and  business  communities.  A  business  only  has  a 
certain  portion  of  its  operating  budget  to  allocate  to  advertising  in  the  course  of  a 
year,  and  any  business  will  attempt  to  maximize  the  impact  of  its  advertising.  If  a 
limitation  were  to  be  imposed  on  tiie  deductibility  of  advertising  costs,  it  would 
make  the  same  amount  of  advertising  more  expensive.  Like  the  Red  Queen  in 


1187 


Alice  in  Wonderland,  companies  would  have  to  run  faster  (or  in  this  case,  make 
larger  expenditures)  merely  to  remain  in  the  same  place. 

If  the  tax  deductibility  of  advertising  is  limited,  companies  would  be  forced 
to  consider  one  or  more  of  the  following  options: 

1.  Decrease  their  expenditures  for  advertising; 

2.  Reduce  their  work  force  or  mandate  other  expense  reductions  in  an 
effort  to  increase  productivity  so  that  they  can  apply  "savings"  to  the 
increased  cost  of  advertising  in  order  to  maintain  the  same 
communication  levels. 

3.  Shift  expenditures,  where  possible,  from  advertising  to  promotional 
or        other  communication  vehicles  that  will  continue  to  be  fully  tax 

deductible. 

Before  I  expand  on  these  three  points,  permit  me  to  imderscore  the  effect 
the  recession  already  has  had  on  business  in  general.  As  the  Subcommittee 
knows,  many  of  this  coimtrys  most  respected  business  entities  have  found  it 
necesseiry  to  lay  off  tens-of-thousands  of  workers  and  to  close  major  installations 
throughout  this  country  in  an  effort  to  maintain  economic  viability  and 
competitiveness.  These  companies,  like  all  others,  soon  will  be  facing  higher 
corporate  taxes.  A  Umitation  on  the  tax  deductibility  of  advertising  will  further 
increase  their  teix  burden. 

While  companies  can  elect  to  decrease  advertising  budgets  to  compensate 
for  the  reduced  deductibihty  of  advertising,  less  advertising  will  translate  into  a 
reduction  in  sales  for  companies'  goods  and  services.  Reduced  advertising  will 
resonate  throughout  the  economy.  There  will  be  less  revenue  for  the  advertising 
agencies  that  develop  advertising  and  the  media  which  carry  advertising 
messages,  including  newspapers,  television  and  radio  stations,  magazines,  and 
other  specialty  publications.  Reduced  advertising  also  will  mean  less  revenue  for 
all  those  businesses  that  support  and  supply  the  advertising  commimity. 

Another  option  for  companies  will  be  to  reduce  their  workforce,  or  to  make 
other  expense  reductions.  Theoretically,  the  "savings"  from  these  cutbacks  could 
be  applied  to  a  company's  advertising  budget  in  order  to  maintain  cvirrent  levels  of 
advertising.  Some  people  have  suggested  that  companies  instead  could  pass  these 
higher  costs  on  to  the  public.  But,  even  a  cxirsory  reading  of  the  business  pages 
demonstrates  that  in  this  economy,  it  is  virtuedly  impossible  for  companies  to  raise 
prices.  Companies  that  do  risk  a  downturn  in  sales,  and  lower  sales  mean  fewer 
jobs  in  the  long  run.  Most  companies,  as  already  noted,  face  higher  costs  and  are 
aggressively  trimming  budgets,  and  many  now  are  la3ring  off  people  in  response  to 
growing  economic  pressure  and  increasing  competition. 

Faced  with  higher  advertising  costs,  ainother  strategy  for  companies  will  be 
to  shifl  advertising  expenditures  to  promotion,  or  other  communication  vehicles 
that  continue  to  be  fully  tax  deductible.  While  it  is  well  established  that 
advertising  is  the  most  efficient  method  of  sellins  to  mass  markets,  less  efficient 
methods  will  become  more  attractive  if  advertisijig  is  made  more  expensive 
because  it  is  less  than  fully  deductible.  If  advertising  becomes  more  expensive, 
companies  may  shift  to  other  communication  vehicles,  and  if  these  vehicles  are 
defined  as  advertising,  companies  may  then  resort  to  other  options,  including 
reductions  in  levels  of  communication. 

This  scenario  highlights  the  difficulty  of  defining  what  constitutes 
advertising  as  compeinies  concentrate  on  increasing  public  awareness  of  their 
products  and  services.  The  word  "advertising"  is  not  a  term  of  art  -  it  does  not 
have  any  fixed  or  agreed  upon  definition.  Even  the  most  experienced  practitioners 
in  the  field  often  disagree  as  to  what  should  be  considered  advertising  and  what 
should  be  excluded.  Nevertheless,  the  proposal  to  limit  the  deduction  for 
adverting  costs  will  require  the  DepEutment  of  the  Treasury  to  make  such  a 
determination. 


1188 


How  will  this  determination  be  made  to  insure  a  fair  tax  policy?  Will  direct 
mail  or  signs  in  retail  stores  be  considered  advertising?  What  about  decorated 
shipping  containers  which  protect  the  product  and  are  also  used  for  display 
purposes?  Should  bramd  or  company  logos  on  trucks,  tee-shirts,  or  other  wearing 
apparel  be  defined  as  advertising?  Should  advertising  be  separated  from  other 
related  communication  vehicles  such  as  "^ubUc  relations"  and  "promotion?"  These 
examples,  of  course,  could  be  multiplied  many  times  over.  Developing  working 
concepts  will  be  complex,  time  consuming,  and  impose  high  compliance  costs.  But, 
all  this  highly  technical  effort  and  burdensome  bxireaucratic  expense 
notwithstanding,  these  efforts  still  cannot  avoid  significantly  hampering  the 
selling  process. 

The  members  of  A.N.A.  are  among  the  country's  largest  employers  and  most 
sophisticated  advertisers.  The  three  options  I  have  outlined  are  the  ones  with 
which  they  will  be  faced  if  advertising  becomes  less  than  fiilly  tax  deductible  as  a 
business  expense.  But  there  are  also  hundreds-of-thousands  of  smzdl  businesses 
throughout  the  United  States  that  will  face  the  same  difficult  choices.  These  £ire 
not  just  small  manufacturers  or  service  based  businesses,  but  grocery  stores,  drug 
stores,  apparel  stores,  and  hardware  stores  that  make  manufactiu-ers'  products 
available  to  consumers.  At  every  step  in  the  distribution  process,  advertising  is 
the  most  effective  and  most  efBdent  way  to  reach  consumers  -  but  taxing 
advertising  expenses  will  greatly  reduce  its  efficiency. 

When  Wharton  Econometrics  Forecasting  Associates,  Inc.  specifically 
analyzed  the  issue  of  limiting  advertising  deductions  as  it  impacts  small  business, 
it  concluded:  "The  impact  of  limiting  the  deductibility  of  advertising  expenses 
should  have  a  larger  negative  impact  on  small  business  than  on  large  business  .  .  . 
many  new  small  business  firms  enter  existing  markets  with  the  help  of 
advertising  --  it  will  make  it  more  expensive  for  new  small  businesses  to  obtain  a 
sufficient  market  share.  These  higher  costs  of  entering  markets  will  discotirage 
the  creation  of  new  business  and  inhibit  competition." 

In  fact,  the  advertising  tax  deductibility  limitations  proposal  will  impact 
particularly  heavily  on  companies  ~  whatever  their  size  -  that  are  attempting  to 
introduce  new  products  or  break  into  new  markets.  These  companies, 
furthermore,  wiU  find  themselves  competing  against  companies  that  developed 
market  share  at  a  time  when  they  could  immediately  deduct  100%  of  their 
advertising  expenses.  Placing  a  burden  on  advertising,  a  key  tool  of  economic 
competition,  is  clearly  coimterproductive. 

Advertising  is  merely  an  integral  part  of  the  total  marketing  mix.  Any 
"ordinary  and  necessary  business  expense"  is  geared  to  maximizing  the  sale  of 
goods  and  services.  A  business  expense  in  job  training,  reseeirch  and  development, 
public  relations  and  advertising  aU  lead  business  to  the  same  goal.  In  light  of  that 
fact,  is  there  any  business,  tax,  or  public  policy  purpose  to  be  served  by  singling 
out  and  discriminating  {igainst  advertising  throu^  the  tax  code?  I  strongly  urge 
Congress  not  to  head  down  the  road  of  micro-managing  the  btisiness  process 
through  differential  tax  treatment  of  the  various  segments  of  product  development 
and  the  selUng  process.  Furthermore,  I  believe  that  once  we  begin  to  head  down 
this  road  it  w5l  be  extremely  difficult  to  turn  back. 

Proponents  of  limiting  the  advertising  tax  deduction  have  argued  that  since 
some  advertising  provides  benefits  for  longer  than  one  year,  advertising  costs 
should  not  be  permitted  to  be  taken  fully  in  the  year  incurred.  Unfortunately, 
while  this  argument  initially  may  sotmd  attractive,  closer  examination 
demonstrates  such  an  approach  will  be  administratively  unworkable  and 
economically  damaging. 

Most  advertising  is  directed  to  the  sale  of  a  particular  product  or  service  in 
a  very  limited  time  fi-ame.  For  example,  supermarket  advertising  in  newspapers 
for  food  specials,  national  TV  seasonal  and  holiday  promotions,  buyer  incentive 
programs,  classified  advertising  for  real  estate,  job  openings,  and  a  multitude  of 
other  goods  and  services  all  serve  to  fill  the  advertising  space  of  our  national  and 
local  media.  To  allow  a  small  number  of  advertisements,  that  theoretically  may 
have  an  impact  in  more  than  one  year,  to  create  a  precedent  for  all  other 
advertising  is  clearly  unfair  and  inappropriate. 


1189 


Furthermore,  no  one  knows  whether  a  new  advertising  campaign  will  be 
successful,  or  how  long  the  efifects  of  the  advertising  will  last.  Yet  this  proposal 
totally  ignores  the  fact  that  most  new  product  introductions,  and  their  advertising, 
fail  in  the  marketplace.  How  should  we  capitalize,  for  tax  purposes,  the  famous 
campaign  for  the  Edsel  automobile?  In  fact,  the  number  of  new  products  being 
brought  into  the  market  has  expanded  drastically  in  the  last  few  years,  but  the 
success  rate  has  gone  down.  From  1980  to  1985,  some  28,196  new  items  were 
brought  onto  the  market,  but  only  12%  succeeded.  From  1985  to  1990,  amother 
54,080  products  were  brought  onto  the  market,  but  only  10%  succeeded. 
Advertising  is  not  magic.  Nothing  kills  a  bad  product  faster  than  good 
advertising.  Without  effective  advertising,  however,  the  odds  of  getting  lost  in  the 
clamor  of  the  competitive  marketplace  has  increased  exponentially. 

In  1989,  the  Advertising  Tax  Coalition  asked  two  winners  of  the  Nobel  Prize 
in  Economics,  the  late  Dr.  George  Stigler  of  the  University  of  Chicago,  and  Dr. 
Kenneth  Arrow  of  Stanford  University,  to  carry  out  a  comprehensive  and 
systematic  examination  of  proposals  to  change  the  tax  treatment  of  advertising. 
Their  findings  were  published  in  August  of  1990.  "Advertising  is  a  powerful  tool  of 
competition,"  they  wrote.  "It  provides  vaduable  information  about  products  and 
services  in  an  efficient  and  cost  effective  manner.  In  this  way,  advertising  helps 
the  economy  to  fimction  smoothly  --  it  keeps  prices  low  and  facilitates  the  entry  of 
new  products  and  new  firms  into  the  market." 

Economists  have  long  recognized  the  role  of  advertising  in  providing 
information.  The  basic  economic  model  of  perfect  competition  assimies  that 
consumers  have  perfect  information.  In  a  groundbreaking  study,  for  which  he  won 
the  Nobel  prize,  however,  Stigler  showed  that  constmiers  rarely  have  such 
information  --  hence  the  need  for  advertising. 

Stigler  and  Arrow  also  noted,  "Since  the  information  conveyed  by 
advertising  is  valuable,  one  must  be  particularly  cautious  about  taxes  that  would 
raise  the  cost,  and  hence  lower  the  quantity  of  advertising.  Such  taxes  would 
reduce  the  overall  flow  of  economic  information  available  to  consumers.  As  a 
result,  we  expect  that  prices  would  rise,  the  dispersion  in  prices  for  particular 
products  woiild  increase,  and  consimiers  would  be  less  able  to  find  goods  that 
satisfy  their  preferences." 

When  commenting  on  the  durability  of  advertising  these  two  distinguished 
scholars  wrote,  "Our  works  points  out  how  very  difficvJt  it  is  to  obtain  any  general 
measure  of  the  durability  of  advertising.  In  part,  this  is  probably  due  to  the  fact 
that  advertising  is  an  extremely  heterogeneous  product  and  thus  not  easily 
measured;  and  in  part,  it  is  probably  due  to  the  fact  that  economists  do  not  yet 
have  a  good  testable  model  of  the  way  in  which  advertising  affects  sales.  In  either 
event,  we  do  not  beUeve  that  existing  economic  evidence  supports  proposed 
chamges  in  the  tax  treatment  of  advertising." 

Stigler  and  Arrow  concluded,  "Although  there  are  a  number  of  economic 
studies  that  suggest  that  advertising  is  long-lived,  they  are  generally  so  fi-aught 
with  errors  that  one  cannot  rely  on  their  findings.  When  we  correct  for  some  of 
the  statistical  problems,  we  find  that  estimated  duration  intervals  are  much 
shorter  than  originally  thought.  Moreover,  there  are  a  nimiber  of  studies 
(partictdarly  more  recent  ones)  that  suggest  that  advertising  depreciates  so 
rapidly  that  virtually  all  of  its  effects  are  gone  within  a  year." 

Critics  of  advertising  also  have  suggested  that  advertising  should  be  singled 
out  for  adverse  tax  treatment  because  other  business  expenses,  in  their  view,  such 
as  research  and  development,  are  somehow  more  vital  to  the  nation's  economy.  It 
is  suggested  that  advertising  is  frivolous  in  comparison  to  these  supposedly  more 
important  functions.  But  this  view  totedly  ignores  the  role  advertising  plays  in  our 
economy.  It  often  has  been  claimed,  that  "if  you  build  a  better  mouse  trap  the 
world  will  beat  a  path  to  yovu-  door."  However,  many  companies  have  found  that 
the  improvements  their  research  and  development  programs  yield  often  are 
completely  nullified  if  they  do  not  effectively  bring  this  information  to  the 
attention  of  the  public  through  advertising. 


1190 


In  summary,  the  proposed  limitation  on  the  deductibility  of  advertising 
expenses  is  bad  tax  policy  auid  bad  public  policy.  There  is  no  evidence  that  tWs  tax 
would  be  absorbed  automatically  by  corporate  America  without  adversely  affecting 
corporate  profits.  If  corporate  profits  sire  reduced,  the  tax  base  itself  would  be 
reduced  so  that  this  form  of  taxation  could  prove  to  be  counter-productive.  The 
administrative  burden  on  govenmient  Eind  business  would  be  laborious  aind 
inefficient  as  government  assumed  the  responsibiUty  for  manipulating  and  micro- 
managing  American  business. 

At  best,  our  nation's  economy  is  in  a  very  sensitive  phase  -  it  would  take 
very  little  to  throw  it  into  a  tail  spin.  Corporate  tax  rates  already  have  been 
increased  significantly  in  the  largest  tax  increase  in  our  history.  Even  so,  I  believe 
it  is  far  preferable,  more  efficient,  and  much  soimder  tax  and  public  policy  to  tax 
business  profits,  as  Congress  recently  has  done,  rather  than  to  interfere  with  the 
business  process  by  taxing  advertising. 

The  incentives  for  American  business  now  should  be,  and  must  be,  to 
produce  more  profits  ~  profits  that  will  put  people  back  to  work.  Let  advertising 
do  its  job  by  driving  the  economic  engine  that  creates  sales,  corporate  profits,  and 
employment.  I  urge  you  to  reject  disincentives  that  will  be  counterproductive, 
ftnstrate  business,  stifle  corporate  profits,  and  increase  unemployment. 

One  member  of  Congress  recently  told  a  group  of  advertising  and  media 
executives  that,  "Trying  to  sell  a  product  or  service  without  advertising,  would  be 
hke  a  bird  trying  to  fly  without  wings."  That  metaphor  captures  better  than  most 
the  message  I  hope  to  leave  with  this  Subcommittee  today.  Advertising  to  the 
consimier,  permits  the  consumer  to  make  an  informed  choice  fi-om  a  range  of 
options.  I  urge  you  not  to  clip  its  wings  but  to  let  advertising  carry  its  message 
without  an  additional  burden  that  would  impede  it  in  realizing  its  goal. 


1191 

Mr.  Payne.  Thank  you  very  much,  Mr.  Helm. 

I  feel  like  my  colleague  Mike  Kopetski  before  me;  I  should  an- 
nounce my  biases.  I  am  strongly  opposed  to  changing  the  tax  treat- 
ment of  advertising  based  on  my  own  business  background  and  the 
reliance  of  my  business  on  consumer  advertising,  and  second, 
because  my  wife  is  the  owner  of  an  advertising  agency  in  central 
Virginia,  and  I  feel  like  I  may  have  heard  this  testimony  before 
somewhere. 

I  do  have  several  questions,  though,  that  I  would  like  to  pose  to 
this  panel  before  we  conclude.  The  first  has  to  do,  Mr.  McConaghy, 
with  something  you  brought  up.  You  mentioned  the  AICPA  had 
looked  into  this  issue  of  advertising  giving  rise  to  benefits  that  ex- 
tend beyond  the  current  accounting  period,  and  if  that  is  true, 
should  they  be  capitalized  and  amortized  for  an  additional  period. 
You  mentioned  that  they  had  reached  some  conclusion.  Could  you 
just  comment  once  again  on  the  findings  of  the  AICPA  on  this 
issue. 

Mr.  McConaghy.  Sure.  First,  Mr.  Chairman,  the  pressure  obvi- 
ously for  financial  saving  purposes  is  to  allow  amortization,  be- 
cause that,  of  course,  spreads  the  deduction  and  therefore  adds 
larger  earnings  per  share.  Nevertheless,  with  that  pressure  the  fi- 
nancial accountants  in  the  AICPA  concluded  that  there  really  is  no 
measurable  future  benefit.  And  therefore  generally,  except  for  one 
or  two  isolated  cases,  advertising  has  to  be  deducted  currently  for 
financial  statement  purposes  and  not  capitalized. 

Mr.  Payne.  Mr.  Helm,  it  seems  to  me  companies  or  corporations 
or  entities  that  are  selling  goods  and  services  have  options  among 
different  media.  They  could  advertise  their  products  through  a 
broadcast  medium,  the  newspaper,  public  relations  efforts  or  any 
number  of  ways.  Could  you  comment  on  what  kinds  of  changes 
would  occur  within  the  advertising  business  if  this  particular  pro- 
posal became  law? 

Mr.  Helm.  Well,  very  simply,  faced  with  this  kind  of  a  proposal 
becoming  law,  companies  would  have  two  or  three  options.  One 
would  be  to  simply  reduce  their  expenditures  in  order  to  com- 
pensate for  the  effect  of  the  tax.  That  is  going  to  result  in  less  com- 
munication, it  will  result  in  lower  sales,  it  will  result  in  lower  cor- 
porate profits,  in  my  judgment,  and  therefore  less  tax  revenue,  and 
so  it  will  be  counterproductive. 

Another  option  is  to  try  to  reduce  expenditures  in  other  areas,  be 
it  R&D,  be  it  in  selling  expenses  in  order  to  effect  quote  savings 
that  can  be  applied  to  advertising.  Frankly,  I  see  this  as  placing 
the  Government  in  a  position  of  micromanaging  American  busi- 
ness, and  I  feel  it  would  be  much,  much  preferable  to  have  the 
Congress  continue  to  generate  revenue  through  corporate  profit 
taxes,  through  increases  in  the  corporate  profit  tax.  I  am  not  advo- 
cating still  another  one  on  top  of  the  recent  one,  but  my  plea  is  to 
tax  profit,  not  interfere  with  process. 

Mr.  Payne.  Would  anyone  like  to  comment  then  on  how  this  pro- 
posal would  afiFect  industries?  Are  there  certain  vvinners  and  losers 
that  might  come  about  as  a  result  of  a  proposal  like  this? 

Mr.  White. 

Mr.  White.  Yes,  I  would  be  happy  to.  Clearly  in  the  spectrum  of 
American  business  there  are  industries  and  individual  companies 


1192 

that  rely  significantly  more  heavily,  because  of  the  inherent  nature 
of  their  business,  on  advertising  as  the  mix  of  their  total  expenses 
as  opposed  to,  for  instance,  a  more  industrial-oriented  company 
which  places  a  lot  of  its  investment  in  the  R&D  area  and  in  direct 
contact  with  its  customers,  a  much  more  Hmited  customer  base.  So 
the  very  nature  of  the  proposal  is  inherently  discriminatory  against 
those  types  of  businesses  that  must  of  necessity  rely  more  heavily 
on  advertising  than  those  who  don't. 

Mr.  Payne.  Mr.  Gibian. 

Mr.  Gibian.  I  would  like  to  add  a  point  as  a  tax  lawyer,  and  what 
would  happen  is  that  there  would  be  a  tremendous  incentive  for 
tax  lawyers  to  find,  in  the  complexity  area,  the  areas  that  did  not 
get  disqualified  as  being  current  deductions,  so  you  would  have  a 
whole  new  profession  built  up  of  tax  professionals  who  would  be 
trying  to  find  ways  and  the  means,  no  pun  intended,  to  find  those 
expenditures  which  would  be  deductible,  and  that  in  turn  would 
create  enormous  complexity,  as  one  of  the  other  copanelists  has 
commented  on. 

Mr.  Payne.  Mr.  White. 

Mr.  White.  I  think  in  addition  to  the  straight  complexity,  it 
would  have  the  very  real  likelihood  of  pushing  advertising  market- 
ing and  promotional  efforts  in  many  directions  that  most  of  us  con- 
sider less  desirable,  more  intrusive  forms — telemarketing  the  direct 
sales  calls,  and  so  forth.  Advertising  is  a  more  passive  and  hence, 
we  believe,  more  benign  approach  to  communication. 

Mr.  Payne.  I  want  to  thank  you  all  very  much  for  your  testi- 
mony. It  will  be  very  useful  to  us  as  we  continue  to  consider  this 
and  other  revenue  issues.  Thank  you  very  much. 

Mr.  Payne.  Our  fourth  panel  will  continue  testimony  on  the 
issue  of  the  amortization  of  advertising  expenses,  and  testimony  on 
the  depreciation  of  assets  in  the  printing  industry. 

Would  those  who  are  carrying  on  conversations  please  take  them 
outside  the  hearing  room  so  that  we  can  continue  with  our  next 
panel. 

Our  first  witness  in  this  panel  is  with  the  Leadership  Council  on 
Advertising  Issues,  Sheldon  S.  Cohen,  counsel  with  Morgan,  Lewis 
and  Bockius  here  in  Washington,  D.C. 

Mr.  Cohen,  if  you  would  proceed  on  the  5-minute  rule  please, 
thank  you. 

STATEMENT  OF  SHELDON  S.  COHEN,  COUNSEL,  LEADERSHIP 
COUNCm  ON  ADVERTISING  ISSUES 

Mr.  Cohen.  Mr.  Chairman,  I  certainly  will.  And  I  will  summa- 
rize my  testimony,  I  will  not  read  it  all.  You  have  heard  a  lot  today 
and  you  have  got  a  lot  more  to  hear. 

Mr.  Payne.  Thank  you,  Mr.  Cohen. 

Mr.  Cohen.  I  would  like  to  discuss  with  you  briefly  a  summary 
of  my  submission,  why  it  is  unsound  economic  and  tax  policy  to 
capitalize  advertising  costs  and  to  amortize  them  over  a  number  of 
years. 

It  is  elementary  that  advertising  is  an  important  element  in  our 
national  economy.  It  increases  demand  for  products  which  reduces 
their  costs  and  results  in  the  wonderful  vibrant  economy  that  is  the 


1193 

envy  of  the  world.  Any  change  in  the  tax  treatment  will  have  seri- 
ous economic  ramifications. 

Advertising  costs  have  been  treated  as  deductible  items  back  to 
the  beginning  of  the  modem  income  tax,  and  indeed  I  was  studying 
George  Boutwell's  manual  to  the  1862  income  tax,  and  advertising 
costs  were  deductible  in  those  days.  There  really  isn't  any  future 
benefit,  that  has  been  discussed  here. 

The  two  or  three  instances  where  advertising  results  in  capital 
goods,  that  is  signs  or  other  materials  that  last  for  1  year  or  more 
than  1  year,  or  advertising  campaigns  that  are  directed  toward  fu- 
ture sales,  that  is  a  product  that  isn't  on  the  market  yet.  Those 
costs  right  now  have  to  be  capitalized  and  amortized  over  the  pe- 
riod of  your  usefulness  or  those  costs  which  relate  to  the  creation 
of  a  capital  good  have  to  be  amortized.  So  we  do  have  a  dichotomy 
now,  some  are  deductible — most  are  deductible,  a  very  limited  clas- 
sification are  capitalized  and  amortized  now,  and  I  think  the  con- 
cept that  is  thrown  up  here  is  misconceived. 

An  important  element  here,  as  has  been  discussed  with  you,  is 
the  GAAP  role  and  the  AICPA  statement.  There  the  accountants 
are  working  against  their  clients'  interest,  you  see.  The  accountants 
are  saying  that  we  don't  want  to  let  you  amortize  those  costs  be- 
cause that  will  increase  your  earnings  per  share,  and  that  might 
be  misstated,  and  therefore  we  want  vou  to  reflect  a  more  conserv- 
ative income  to  the  current  owners  of  your  stock.  That  is  a  careful, 
well-thought  through,  well-conceived  idea,  and  it  goes  to  all  of  the 
SEC  full  disclosure  rules  and  the  fact  that  one  shouldn't  puff  one's 
income,  one  shouldn't  puff  it  for  tax  purposes,  either. 

The  complications  are  myriad.  Presently  there  are  a  number  of 
accounting  treatments  that  are  different  for  tax  and  for  book- 
keeping purposes.  We  should  not  multiply  those  because  each  one 
creates  another  justification  for  another  one,  and  each  of  those  cre- 
ates complications.  They  have  to  be  accounted  for  separately,  they 
have  to  be  reconciled  to  books.  There  are  adjustments  on  the  tax 
return;  the  schedule  M  on  the  tax  return  has  to  justify  those  items. 
Those  are  each  complications  both  for  the  taxpayer  and  for  the 
Government,  just  equally  for  the  Government. 

I  might  remind  the  chairman  that  the  chairman  of  the  whole 
committee,  Mr.  Rostenkowski,  said  in  discussing  this  just  last  year 
that  the  amortization,  the  rule  that  was  put  in  for  intangibles 
would  not  be  used  as  a  justification  for  capitalizing  advertising 
costs  and  amortizing  them  over  a  period  of  time. 

So,  in  summary,  I  would  say  that  the  committee  has  been  search- 
ing for  a  number  of  years  now  for  ways  to  simplify  the  Internal 
Revenue  Code.  One  of  the  most  important  ways  to  simplify  the  In- 
ternal Revenue  Code  is  not  to  add  complications.  Certainly  this 
kind  of  concept  would  add  further  complications. 

Thank  you,  sir. 

[The  prepared  statement  and  attachments  follow:] 


1194 


STATEMENT  OF  SHELDON  S.  COHEN 
LEADERSHIP  COUNCIL  ON  ADVERTISING  ISSUES 

TAX  POLICY  AMD  ECONOMIC  ISSDEfl  RELATED  TO 
DEPyCTIBT^^ITY  O?  ApVEBTISiyq  DMpEy  fEDgRM.  TAX  LAW 

I.  Introduction 

I  am  Sheldon  S.  Cohen,  a  partner  in  the  law  firm  of  Morgan, 
Lewis  &  Bockius.   I  appear  as  a  representative  of  the  Advertising 
Leadership  Council,  a  coalition  of  major  advertisers,  advertising 
agencies,  and  media  companies."  The  Advertising  Leadership 
Council  asked  me  to  discuss  why  it  is  unsound,  from  a  tax  policy 
and  economic  perspective,  to  require  that  advertising  costs  be 
capitalized  and  amortized  over  a  period  established  by  statute. 

Advertising  expenses  are  a  major  component  of  the  national 
economy.   Advertising  encourages  both  competition  and  growth  of 
business.   Advertising  takes  many  forms,  from  commercials  on 
radio  and  television,  to  print  advertisements  in  newspapers  and 
magazines,  to  billboards,  blimps,  and  the  sponsorship  of  sporting 
events.   It  is  used  to  introduce  new  products  and  services,  or  to 
convey  information  about  prices  and  availability.   Advertising 
reminds  consumers  of  their  favorable  experiences  with  particular 
products  or  services.   Advertising  does  not  motivate  people  to 
purchase  products  with  which  they  had  an  unfavorable  experience 
or  which  have  not  lived  up  to  their  expectations. 

Any  change  in  the  present  treatment  of  advertising  costs 
will  have  serious  economic  repercussions.   Advertising  costs  are 
deductible  under  present  law  because  they  are  generally  incurred 
to  produce  current  revenues.   The  amortization  of  advertising 
costs  over  a  period  of  years  would  distort  the  matching  of  these 
expenses  with  related  revenues  and  would  greatly  complicate  the 
filing  of  tax  returns. 

II.  Federal  Tax  Treatment  of  Advertising  Expenses 

Section  162  of  the  Internal  Revenue  Code  allows  a  current 
deduction  for  ordinary  and  necessary  business  expenses.^ 
Section  263  prohibits  deductions  for  any  amount  paid  to  acquire 
an  asset  or  to  increase  the  value  of  any  asset.   The  primary 
effect  of  characterizing  a  business  expenditure  as  either  a 
business  expense  or  a  capital  expenditure  concerns  the  timing  of 
the  taxpayer's  cost  recovery.   A  business  expense  is  currently 
deductible,  whereas  a  capital  expenditure  is  usually  amortized 
over  the  life  of  the  relevant  asset. 

Through  sections  such  as  162  and  263,  the  Code  endeavors  to 
match  deductions  with  benefits  over  the  period  during  which  the 
benefits  are  enjoyed.   The  matching  of  deductions  and  income 
results  in  a  more  accurate  calculation  of  net  income  for  tax 
purposes.   Generally,  if  an  expenditure  produces  significant 
benefits  that  extend  beyond  the  year  in  which  the  expenditure  is 
made,  that  expenditure  is  capitalized.   An  example  would  be  legal 
and  accounting  fees  incurred  in  connection  with  a  corporate 
merger  or  acquisition.-'  Moreover,  if  an  expenditure  contributes 
to  the  creation  or  enhancement  of  a  separate,  identifiable  asset, 
that  expenditure  is  generally  capitalized  and  amortized.-'  An 
example  would  be  costs  incurred  to  develop  a  patent  or  trademark. 


1/   A  list  of  the  members  of  the  Advertising  Leadership  Council 
is  attached  as  an  appendix  hereto. 

2/   All  references  to  "sections"  are  to  sections  of  the  Internal 
Revenue  Code  of  1986,  as  amended.   The  rule  enunciated  in 
section  162  has  been  consistently  applied  since  the  advent 
of  the  modern  income  tax  early  in  this  century. 

3/    Indopco.  Inc.  v.  Commissioner.  112  S.Ct.  1039  (1992). 

4/   Commissioner  v.  Lincoln  Savings  &  Loan  Ass'n.  403  U.S.  345 
(1971). 


1195 


Advertising  expenses  have  long  been  recognized  as  ordinary 
and  necessary  business  expenses.   All  advertising  expenses  that 
are  reasonably  related  to  the  taxpayer's  trade  or  business  are 
currently  deductible,  including  amounts  spent  on  goodwill  or 
institutional  advertising.-'  The  law  in  this  area  is  so 
established  that  the  IRS  and  the  courts  have  rarely  questioned 
the  deductibility  of  advertising  expenses. 

Proponents  of  capitalization  of  advertising  expenses  have 
argued  that  such  expenses  produce  benefits  lasting  beyond  one 
year,  either  in  the  form  of  future  income  or  in  the  form  of  a 
separate  intangible  asset  like  goodwill  or  product/brand-name 
loyalty.^  They  generally  have  been  seeking  this  change  as  a 
revenue-raising  measure  to  offset  changes  which  would  cost 
revenue.   Advocates  of  this  position  erroneously  state  that 
advertising  produces  benefits  or  revenues  extending  beyond  the 
current  tax  year. 

Advertising  costs  do  not  produce  significant  benefits 
extending  beyond  the  current  tax  year.   Product  advertising  — 
such  as  a  retail  electronic  store's  advertisements  for  a  holiday 
sale  —  does  not  generate  revenues  beyond  the  period  that  the 
advertisement  is  published  or  broadcast.   Another  example 
familiar  to  most  Washingtonians  is  the  weekly  advertising 
supplement  for  Giant  Food.   This  advertisement  prominently 
features  the  food  and  drug  items  on  sale  and  the  prices  for  such 
items.   The  "product"  being  sold  is  the  particular  item  at  the 
advertised  price  and  this  advertisement  produces  benefits  for 
Giant  Food  only  so  long  as  the  company  offers  that  product  at 
that  price. 

Institutional  or  goodwill  advertising,  such  as  a  general 
advertisement  by  a  corporation  to  keep  the  corporation's  name  in 
the  minds  of  the  public,  generally  does  not  generate  revenues 
beyond  the  current  year.   Institutional  or  goodwill  advertising 
is  typically  done  by  large  companies,  and  usually  on  a  regular 
basis.   There  may  be  incidental  future  benefits  from 
institutional  or  goodwill  advertising,  but  they  are  insignificant 
and  impossible  to  quantify.   These  benefits  depend  on  each 
individual  consumer's  recollection  of  an  advertisement  in  a 
future  year.   For  example,  if  a  consumer  purchases  a  Toyota  in 
1994,  is  it  due  to  the  commercial  he  saw  in  1992  or  1993,  the 
commercial  he  saw  the  night  before  he  bought  the  car,  or  the 
cumulative  effect  of  seeing  advertisements  for  a  Toyota  from  1992 
through  1994? 

Under  present  law,  advertising  expenses  have  been 
capitalized  in  two  instances.   The  first  instance  is  when  the 
expenses  relate  to  a  tangible  asset,  such  as  a  sign  or  a 
billboard,  or  an  intangible  asset,  such  as  the  rights  to  package 
designs.   In  this  first  instance,  it  is  appropriate  to  amortize 
the  billboard  or  the  package  design  over  its  useful  life.   The 
second  instance  in  which  advertising  expenses  have  been 
capitalized  is  when  the  terms  of  the  advertisement  explicitly 
extend  beyond  the  current  tax  year,  such  as  an  advertisement  for 
a  product  that  will  be  unavailable  until  the  following  year. 

III.  Matching  Principle  and  Book/Tax  Parity 

As  I  have  stated,  the  tax  law  attempts  to  match  expenses 
with  the  revenues  generated  by  such  expenses  to  accurately 
measure  net  income  for  tax  purposes.   Generally  accepted 
accounting  principles  ("GAAP")  have  the  same  goal.   While  the  tax 


See,  e.g. .  Congressional  Budget  Office,  Selected  Spending 
and  Revenue  Options,  134,  June  1991  (hereinafter  "CBO 
Papers") . 


1196 


accounting  treatment  of  an  item  is  not  necessarily  dictated  by 
book  accounting  principles,-'  those  principles  are  often  helpful 
in  deciding  whether  an  expense  should  be  deducted  or  capitalized. 

There  is  currently  no  GAAP  governing  the  treatment  of 
advertising  costs.   Some  businesses  deduct  advertising  costs  when 
paid  or  incurred  whereas  some  businesses  capitalize  advertising 
costs  and  amortize  them  over  a  period  of  years.   However,  an 
AICPA  subcommittee  has  promulgated  a  proposed  Statement  of 
Position  ("SOP")  which  would  treat  advertising  costs  as 
deductible  when  paid  or  incurred  unless  (a)  the  advertising  is 
"direct-response  advertising"  or  (b)  the  costs  are  for  billboards 
or  blimps  which  are  used  for  several  advertising  campaigns.   I 
understand  that  this  proposed  SOP  has  been  approved  by  the  FASB 
and  is  set  to  be  released  this  quarter. 

If  costs  are  for  direct-response  advertising,  such  costs 
would  be  reported  as  "assets"  and  written  off  over  the  estimated 
period  of  the  benefits.   The  proposed  SOP  defines  direct-response 
advertising  as  advertising  intended  to  persuade  a  customer  to 
purchase  a  company's  products  or  services  by  responding 
specifically  to  the  advertisement  (i.e. .  by  means  of  a  coded 
order  form  included  with  an  advertisement,  a  coded  coupon  turned 
in  by  a  customer,  etc.).   This  proposed  rule  is  similar  to  the 
rule  for  tax  purposes,  which  requires  capitalization  of 
advertising  costs  when  it  is  certain  that  the  benefits  extend  to 
future  periods.^' 

The  proposed  GAAP  exception  for  billboards  and  blimps  is 
identical  to  the  rule  for  tax  purposes.   For  example,  a 
corporation  that  uses  signs  or  billboards  to  advertise  its 
products  must  capitalize  the  cost  of  the  sign  or  billboard  and 
amortize  it  over  the  respective  asset's  useful  life  for  federal 
tax  purposes.-' 

Neither  product  advertising  nor  institutional  and  goodwill 
advertising  generate  significant  benefits  or  revenues  beyond  the 
current  tax  year.   Thus,  it  would  be  violative  of  the  matching 
principle  to  require  that  advertising  costs  be  capitalized  and 
amortized  over  an  arbitrarily  determined  period.   Absent  policy 
justifications  for  departing  from  the  matching  principle,  the  tax 
law  should  be  consistent  with  book  accounting  principles. 
Otherwise,  you  will  add  new  complications  to  schedules  required 
to  reconcile  such  differences. 

IV.   Capitalisation  ot   Advertising  Costs  Would  Conflict  With 
Long-Standjng  Case  Law  and  IRS  Rulings 

A.   Advertising  costs  do  not  create  or  enhance  a 
sepjirate  intangible  asset 

The  Supreme  Court  held  in  Lincoln  Savings  that  premiums  paid 
by  a  savings  and  loan  to  the  FSLIC  for  a  secondary  reserve  fund 
should  be  capitalized  because  the  premiums  created  or  enhanced  a 


7/   I.R.C.  S  446(a);  see  Thor  Power  Tool  Co  v.  Commissioner, 

439  U.S.  522  (1979);  see  also  American  Auto.  Ass'n  v.  United 
States.  367  U.S.  687  (1961). 

8/   See  Rev.  Rul.  68-283,  1968-1  C.B.  63  (amounts  paid  to  a 
corporation  for  advertising  and  promoting  the  taxpayer's 
products  at  a  fair  resulted  in  benefits  extending  beyond  one 
year  because  the  fair  operated  for  six  months  in  each  of  two 
years) . 

9/   See  Alabama  Coca-Cola  Bottling  Co.  v.  Commissioner.  28 

T.C.M.  (CCH)  635  (1969)  (cost  of  "Coke"  signs  placed  by  a 
bottler  into  retailers'  stores  had  to  be  capitalized  and 
amortized  over  the  useful  lives  of  the  signs) . 


1197 


separate  and  distinct  additional  asset  (i.e. ,  the  reserve 
fund) .—   As  clarified  by  the  recent  Indopco  decision,  the 
creation  or  enhancement  of  a  separate  asset,  while  not  a 
prerequisite  to  capitalization,  will  certainly  suggest  that 
capitalization  is  appropriate. 

Proponents  of  the  capitalization  of  advertising  costs 
erroneously  believe  that  advertising  is  a  substantial  contributor 
to  the  creation  of  a  separate  intangible  asset.—   Their 
argument  is  that  a  company's  sales  receipts  would  decline 
dramatically  if  advertising  were  curtailed  or  eliminated.   Thus, 
advocates  of  this  view  reason  that  advertising  creates  an 
assurance  that  customers  will  make  purchases  next  week,  next 
month,  and  next  year.   They  assert  that  this  assurance  of 
continued  customer  purchases  is  itself  an  intangible  asset,  much 
like  purchased  goodwill.   Whether  this  intangible  is  denoted 
"goodwill,"  "brand  loyalty,"  or  something  else,  its  effects  are 
said  to  be  long-lived.   On  this  basis,  it  is  stated  that  such 
expenses  are  capital  in  nature  and  should  be  fully  or  partially 
capitalized  rather  than  deductible  in  the  year  incurred. - 

The  fundamental  flaw  in  this  analysis  is  a  misunderstanding 
of  the  functions  performed  by  advertising.   A  decline  in 
advertising  would  certainly  reduce  a  company's  sales  over  time, 
but  this  would  be  the  result  of  a  reduced  amount  of  information 
provided  to  consumers.   It  is  simply  untrue  that  long-term 
customer  loyalties  —  namely,  the  assurance  that  current 
customers  will  buy  a  company's  goods  in  future  years  —  are 
created  by  this  year's  advertising  costs. 

Although  advertising  is  a  valuable  activity  to  advertisers 
and  consumers  alike,  advertising  itself  does  not  create  something 
of  value.   In  fact,  to  serve  its  business  purpose  of  conveying 
information,  advertising  must  be  repeated  over  and  over  as  it 
does  not  have  long-term  staying  power.   Consider  three  categories 
of  advertising:   (a)  advertising  of  new,  improved,  or  expanded 
products  or  services,  (b)  advertising  of  products  that  are 
available  for  a  limited  time  or  are  on  sale,  and 
(c)  institutional  or  goodwill  advertising. 

First,  for  a  new,  improved,  or  expanded  product  or  service, 
advertising  is  critically  important.  New  product  advertising  is 
intended  to  generate  immediate  interest,  attention,  and  sales. 

Second,  for  time-sensitive  information  about  a  product  or 
service,  such  as  a  sale  price  or  limited  availability, 
advertising  is  the  most  effective  means  of  informing  potential 
customers  about  the  product  or  service  being  offered.   Grocery 
stores  and  general  merchandise  retailers  make  extensive  use  of 
such  advertising  on  a  daily  or  weekly  basis.   Automobile 
dealerships  and  airlines  and  other  businesses  utilize  such 
advertising  when  they  offer  discount  fares  or  other  limited-time 
features  to  consumers. 

Long-term  sales  are  not  the  purpose  of  either  of  these  two 
forms  of  advertising.   Indeed,  the  information  presented  in  such 
advertising  is  usually  out-of-date  within  a  few  days  or  weeks. 


10/   Commissioner  v.  Lincoln  Savings  &  Loan  Ass'n.  403  U.S.  345 
(1971). 

11/   "A  Little  Too  Creative,  "Forbes.  July  1990;  James  Dezart, 
"New  Turns  in  the  Slugfest  on  Amortizable  Intangibles," 
Mergers  &  Acquisitions.  March/April  1991;  "Time  Is  Right  for 
Washington  to  extend  Tax  Deductibility  to  Purchased 
Goodwill,"  American  Banker.  March  20,  1991. 

12/   See  CBO  Papers  at  134. 


1198 


Such  advertisements  would  be  worthless  or  even  counterproductive 
if  continued  for  an  extended  period. 

The  third  general  category  of  advertising,  which  appears  to 
have  given  rise  to  the  amortization  proposals,  is  institutional 
or  goodwill  advertising.   This  is  advertising  intended  to  remind 
customers  of  the  company's  name  or  to  convey  general  information 
rather  than  new  product  or  time-sensitive  information.   Some  have 
argued  that  this  category  of  advertising  is  an  effort  to  develop 
an  intangible  such  as  goodwill  or  brand  loyalty  that  will  bring 
the  customer  back  for  additional  purchases  in  future  years.   For 
this  reason,  such  advertising  is  thought  to  be  a  capital 
expenditure  rather  than  a  deductible  expense. 

Granted,  customers  develop  loyalties  to  a  product  or  a 
service.   However,  such  loyalty  is  due  to  favorable  experiences 
in  the  past.   Quality  and  reliability  create  repeat  sales,  as 
well  as  encourage  sales  of  a  new  product  produced  by  a  trusted 
company.   Many  factors  contribute  to  quality  and  reliability, 
such  as  research  and  development,  experienced  and  well-trained 
employees,  good  technology  and  equipment,  high  quality-control 
standards  and  so  on.   These  are  the  expenses  that  produce  the 
intangible  value.   Advertising  reminds  the  customer  of  his  or  her 
satisfaction  with  that  quality,  but  it  does  not  create  that 
quality.   Thus,  advertising  creates  a  short-hand  summary  for  the 
customer  of  the  quality  associated  with  the  company  or  particular 
product  or  brand  name.   The  summary  may  come  in  the  form  of 
specific  information  in  an  advertisement.   Or,  the  mere  mention 
of  a  company  name  or  brand  name  may  trigger  the  customer's  mental 
summary . 

Accordingly,  while  advertising  performs  critically  important 
informational  functions,  it  does  not  create  or  enhance  an 
intangible  asset  with  a  useful  life  that  extends  beyond  the 
taxable  year.   The  only  intangible  is  the  one  created  by  the 
quality  of  the  customer's  past  experience  with  the  product  or 
service. 

B.   Advertising  costs  do  not  create  significant 

benefits  that  extend  beyond  the  current  tax  year 

Some  proponents  of  capitalization  argue  that  advertising 
produces  benefits  that  extend  beyond  the  year  in  which  the 
advertising  occurred.   This  conclusion  is  unsupported  by  any 
empirical  evidence,  principally  because  it  is  nearly  impossible 
to  gather  and  measure  any  data  to  substantiate  such  a  claim. 

The  Supreme  Court's  recent  decision  in  Indopco  does  not 
require  the  capitalization  of  advertising  costs.   In  Indopco.  the 
Supreme  Court  found  that  merger  expenses  had  to  be  capitalized 
even  though  they  did  not  create  or  enhance  a  separate  asset.   The 
expenses  at  issue  in  Indopco  related  to  a  specific  corporate 
transaction.   The  Court  relied  on  established  precedent,  which 
held  that  expenses  incurred  in  connection  with  a  change  in 
corporate  structure  are  capital  expenditures.   Moreover,  the 
transaction  created  unmistakable  benefits  extending  beyond  the 
current  year. 

In  the  case  of  advertising,  there  is  no  corporate 
transaction  involved  or  other  identifiable  capital  event.   Thus, 
there  is  simply  no  way  to  measure  the  duration  or  fact  of  any 
future  benefit  generated  by  advertising.   Of  the  three  general 
categories  of  advertising  already  discussed,  only  institutional 
or  goodwill  advertising  could  be  said  to  have  long-term 
effectiveness.   However,  numerous  factors  may  combine  to 
influence  the  duration  of  an  advertising  campaign's  success. - 


13/   Kenneth  J.  Arrow,  Economic  Analysis  of  Proposed  Changes  in 
the  Tax  Treatment  of  Advertising  Expenditures.  1990  p.  22. 


1199 


The  consumer's  interest  in  the  subject  and  ability  to  remember 
must  be  considered.-   These  factors  are  so  individualized  as  to 
be  virtually  impossible  to  quantify.   Additionally,  the  success 
and  duration  of  every  advertising  campaign  is  necessarily 
affected  by  the  intensity  of  the  competition's  advertising.— 

Even  advertising  that  is  meant  to  have  long-term  results  may 
fail  to  do  so.   One  of  the  most  notoriously  unsuccessful 
advertising  campaigns  was  that  for  the  Edsel  in  the  1950s.   The 
advertisers  of  the  Edsel  hoped  to  present  the  public  with  a 
product  it  would  remember  and  enjoy  for  years,  but  the 
advertising  failed  to  do  so. i^  A  more  recent  example  of  failed 
advertising  was  the  advertising  blitz  for  "New  Coke,"  which  not 
only  initially  hurt  Coca-Cola's  business,  but  wound  up  helping 
the  company's  sales  in  an  area  unintended  by  the  "New  Coke" 
campaign,  by  ultimately  increasing  sales  of  "Classic  Coke." 

Advertising  may  also  establish  a  company's  name  or  product 
in  the  mind  of  the  consumer  without  increasing  sales.—   Economic 
studies  which  have  attempted  to  measure  the  lifespan  of 
advertising  generally  have  been  problematic,  but  most  results 
show  that  advertising  depreciates  rapidly  with  effects  rarely 
surviving  as  long  as  a  year.- 

It  makes  little  sense  then  to  capitalize  an  expenditure  that 
does  not  contribute  to  a  significant  benefit  lasting  beyond  the 
year  in  which  the  expenditure  is  made,  particularly  an 
expenditure  that  is  otherwise  an  "ordinary  and  necessary" 
business  expense.   The  current  federal  tax  treatment  of 
advertising  wisely  reflects  this  reality.   The  Service  has  taken 
the  position  in  a  1992  revenue  ruling  that  the  Indopco  analysis 
is  inapplicable  to  advertising  expenses.   According  to  the 
Service,  advertising  expenses  "are  generally  deductible 
under  .  .  .  section  [162]  even  though  advertising  may  have  some 
future  effect  on  business  activities,  as  in  the  case  of 
institutional  or  goodwill  advertising."^'  Advertising  expenses 
are  to  be  amortized  only  "in  the  unusual  circumstance  where  [the] 
advertising  is  directed  towards  obtaining  future  benefits 
significantly  beyond  those  traditionally  associated  with  ordinary 
product  advertising  or  with  institutional  or  goodwill 
advertising.  "23' 

Finally,  capitalization  of  advertising  costs  on  the  basis 
that  such  costs  create  benefits  extending  beyond  one  year  would 
call  into  cjuestion  the  treatment  of  certain  other  ordinary  and 
necessary  business  expenses  that  arguably  have  a  future  benefit 
component.   For  instance,  reasonable  compensation  paid  to  an 
officer  is  generally  deductible  under  section  162  even  though  it 
is  reasonable  to  assume  that  the  officer  being  paid  currently  is 
engaged  in  long-term  planning  that  extends  beyond  the  current 
year.   Currently,  the  IRS  and  the  courts  require  compensation  to 
be  capitalized  only  when  the  recipient  is  performing  services  in 
connection  with  a  capital  transaction.   Otherwise,  they  do  not 
get  involved  in  a  case-by-case  determination  of  whether  the 
recipient's  services  produce  benefits  beyond  one  year.   This  is  a 


14/  Id. 

15/  Id. 

16/  Id. 

12/  Id. 

18/  Id. 

19/  See  Rev.  Rul.  92-80,  1992-2  C.B.  57. 

20/  Id. 


1200 


complication  which  the  Government  and  taxpayers  can  live  better 
without. 

V.  There  is  No  Justifiable  Policy  Reason  for  Setting  an 
Arbitrary  Write-off  Period  for  Advertising  Costs 

As  the  previous  discussion  demonstrates,  it  is  virtually 
impossible  to  quantify  the  long-term  benefits  of  institutional  or 
goodwill  advertising.   It  has  been  recognized  that,  "because  the 
useful  life  of  advertising  depends  on  its  unknown  effect  on 
customers,  any  amortization  rate  would  be  arbitrary."— 
Imposition  of  an  arbitrary  write-off  period  with  absolutely  no 
basis  in  economic  reality  is  unjustified,  particularly  given  the 
heavy  administrative  burdens  that  this  proposal  would  inflict  on 
both  taxpayers  and  the  Government. 

The  proposal  would  require  taxpayers  to  maintain  annual 
accounts  of  their  advertising  expenses  for  years  to  come  and 
would  increase  the  Government's  administrative  costs  of  policing 
this  change  in  the  law.   If  the  tax  law  is  changed  to  require 
that  advertising  costs  be  capitalized,  there  would  be  different 
treatment  of  advertising  costs  for  tax  and  book  accounting 
purposes.   Every  new  distinction  between  GAAP  and  tax  accounting 
creates  new  reconciliations  to  be  accounted  for  as  Schedule  M-1 
adjustments  on  Form  1120.   This  is  a  complicating  factor  for  both 
taxpayers  and  the  Government. 

In  exchange  for  these  heavy  administrative  costs,  the 
proposal  would  merely  defer  a  portion  of  current  costs  to  the 
future.   As  such,  the  proposal  would  generate  additional  revenue 
only  in  the  first  several  years  following  enactment.   To 
illustrate  this  point,  assume  that  a  corporation  spends  annually 
$100  on  advertising  and  thus  under  current  law  deducts  $100  each 
year  on  its  Form  1120  for  advertising  expenses.   If,  for  the  sake 
of  argument.  Congress  enacts  a  provision  requiring  amortization 
of  advertising  expenses  over  a  three-year  period,  the 
corporation's  $100  annual  deduction  would  be  limited  only  for  the 
first  two  years  following  enactment  of  the  write-off  provision. 

In  year  one,  the  corporation  would  be  entitled  to  deduct 
only  one-third  of  the  $100  expense  for  year  one,  or  $33,  and,  in 
year  two,  the  corporation  would  be  entitled  to  deduct  only  one- 
third  of  the  $100  expense  for  year  two  and  one-third  of  the  $100 
expense  from  year  one,  or  a  total  of  $66.   Beginning  in  year 
three,  however,  the  corporation  would  be  entitled  to  a  $100 
annual  deduction,  computed  in  year  three  as  the  sum  of  one-third 
of  the  $100  expense  for  year  three,  one-third  of  the  $100  expense 
from  year  two,  and  one-third  of  the  $100  expense  from  year  one, 
for  a  total  of  $100. 

VI.  Congress  Has  Reoeatedlv  Chosen  to  Uphold  the 
Deductibility  of  Advertising  Expenses 

Like  the  IRS,  Congress  has  also  had  a  recent  opportunity  to 
consider  the  deductibility  of  advertising  expenses.   As  part  of 
the  Revenue  Reconciliation  Act  of  1993,  Congress  adopted  new  Code 
Section  197,  which  permits  goodwill  and  other  intangible  assets 
to  be  written  off  over  15  years  in  certain  circumstances.   In 
considering  the  breadth  of  this  provision,  Chairman  Rostenkowski 
reaffirmed  the  continued  vitality  of  the  deductibility  of 
advertising  expenses:   "Some  persons  have  questioned  whether  this 
bill  [section  197  on  amortization  of  intangibles]  was  intended  to 


21/  See  CBO  Papers  at  134 


1201 


open  the  door  for  reconsidering  tax  deductions  for  advertising 
expenses.   Let  me  be  clear.   The  answer  is,  no."— 

VII.  Conclusion 

The  historical  treatment  of  advertising  as  a  deductible 
business  expense  is  sound  and  reasonable  and  should  be  upheld. 
Current  deductibility  of  advertising  costs  comports  with  proposed 
GAAP  reporting  requirements  and  is  consistent  with  the  tax  law's 
matching  principle. 

Advertising  does  not  create  goodwill,  brand  loyalty,  or 
similar  intangibles.   Customers'  past  experiences  with  a 
product's  or  service's  reliability  and  quality  determine  future 
purchase  decisions.   Many  expenditures  contribute  to  the  creation 
of  such  quality,  including  research  and  development,  employee 
training,  customer  service,  and  the  like.   These  are  the 
expenditures  that  create  intangible  value,  not  advertising  costs. 

Further,  it  is  nearly  impossible  to  establish  that 
advertising  has  any  measurable  effects  on  business  that  extend 
beyond  the  year  in  which  the  advertising  occurred.   Thus, 
establishment  of  an  arbitrary  write-off  period  with  no  basis  in 
economic  reality  would  be  unjustified. 


22/   See  Unofficial  Transcript  of  Oct.  2  Ways  &  Means  Comm. 
Hearing  on  Amortization  of  Intangibles,  91  TNT  208-26 
(Statement  of  Chairman  Rostenkowski) ,  quoted  in  John  W.  Lee, 
Doping  Out  The  Capitalization  Rules  After  Indopco.  57  Tax 
Notes  669,  683  n.l26  (Nov.  2,  1992). 


1202 

Advertiainq  Leadership  Council 

American  Express  Company 

Backer  Spielvogel  Bates  Worldwide,  Inc. 

Black  Entertainment  Television 

D'Arcy,  Masius,  Benton  &  Bowles 

Frito-Lay,  Inc. 

H.  J.  Heinz  Company 

Hublein 

Interactive  Telemedia 

The  Interpublic  Group  of  Companies,  Inc. 

Kraft  General  Foods 

Leo  Burnett  Company 

Mars,  Incorporated 

Mattel,  Inc. 

Nestle  U.S.A. 

Nynex  Corporation 

Ogilvy  &  Mather  Worldwide 

Philip  Morris  Companies  Inc. 

Joseph  E.  Seagrams  &  Sons,  Inc. 

Tatham/RSCG 

Time-Warner  Inc. 

Unilever  United  States,  Inc. 

Univision 

The  Washington  Post  Company 

Young  &  Rubicam 


1203 

Mr.  Payne.  Thank  you,  Mr.  Cohen. 

The  next  paneHst  is  representing  the  National  Retail  Federation, 
David  Feeney,  senior  vice  president  in  the  corporate  tax  depart- 
ment of  R.H.  Macy  Co.  in  New  York. 

Mr.  Feeney. 

STATEMENT  OF  DAVID  L.  FEENEY,  SENIOR  VICE  PRESIDENT, 
CORPORATE  TAXES,  RJI.  MACY  AND  CO^  INC.,  ON  BEHALF 
OF  THE  NATIONAL  RETAIL  FEDERATION 

Mr.  Feeney.  Thank  you.  Mr.  Chairman,  members  of  the  commit- 
tee, my  name  is  David  Feeney.  I  am  senior  vice  president,  cor- 
porate taxes,  as  you  just  pointed  out,  for  R.H.  Macy.  I  am  pleased 
to  appear  today  on  behalf  of  the  National  Retail  Federation  to  ex- 
press our  opposition  to  a  proposal  to  capitalize  advertising  costs 
and  amortize  them  over  a  period  of  years. 

By  way  of  background,  the  National  Retail  Federation  is  the  Na- 
tion's largest  trade  group  that  speaks  for  the  retail  industry.  The 
organization  represents  the  entire  spectrum  of  retailing,  including 
the  Nation's  leading  department,  chain,  discount,  specialty,  and 
independent  stores,  several  dozen  national  retail  associations,  and 
all  50  State  retail  associations.  The  federation's  membership  rep- 
resents an  industry  that  encompasses  over  1.3  million  U.S.  retail 
establishments,  employs  nearly  20  million  people  and  registered 
sales  in  excess  of  $1.9  trillion  in  1992. 

The  retail  industry  would  be  severely  harmed  by  a  proposal  to 
capitalize  advertising.  Our  industry  relies  on  advertising  to  bring 
customers  into  our  stores  on  a  day-by-day  basis.  This  is  an  ordi- 
nary and  necessary  cost  of  doing  business  for  retailers.  There  is  no 
good  tax  policy  basis  for  denying  taxpayers  the  ability  to  deduct 
these  costs  as  incurred.  It  is  also  bad  economic  policy  to  increase 
our  cost  of  advertising,  which  directly  affects  sales.  The  ripple  ef- 
fect on  the  economy  will  be  to  reduce  production  and  lower  eco- 
nomic growth. 

Advertising  fosters  competition.  When  a  business  advertises 
prices  and  quality,  it  forces  competitors  to  lower  prices  and  in- 
crease quality.  Advertising  is  also  the  means  by  which  new  prod- 
ucts can  enter  into  a  market.  Increasing  the  cost  of  advertising  will 
disproportionately  hurt  businesses  that  are  trying  to  market  new 
products.  The  results  will  be  less  innovation  and  a  drag  on  U.S. 
global  competitiveness. 

Advertising  also  provides  customers  with  an  important  source  of 
information  about  products,  including  price  and  quality.  It  provides 
competition  within  the  marketplace,  and  it  also  helps  to  bolster 
consumer  confidence.  With  consumer  confidence  at  its  current  low 
point,  our  Government  cannot  afford  to  adopt  a  policy  that  would 
be  a  further  detriment  to  consumer  confidence.  Rather,  stronger 
consumer  confidence  is  needed  to  help  generate  an  economic  recov- 
ery. 

In  addition,  increased  advertising  costs  will  have  a  particularly 
harsh  impact  on  financially  troubled  retailers,  some  of  which  al- 
ready may  be  in  bankruptcy.  Businesses  that  are  strapped  for  cash, 
and  in  particular  financially  troubled  retailers,  use  advertising  as 
a  means  of  producing  a  quick  boost  in  sales  and  to  increase  their 
cash  flow.  It  would  be  diflficult  for  these  businesses  to  bear  the  in- 


1204 

creased  costs  of  this  advertising.  It  may  affect  their  abihty  to  sur- 
vive, and  it  could  result  in  a  loss  of  jobs  for  manv  Americans. 

Under  current  law,  advertising  costs  generally  are  deducted  in 
the  year  incurred  as  a  cost  of  doing  business.  This  is  the  same  tax 
treatment  that  is  given  to  a  myriad  of  other  business  expenses  that 
are  generally  considered  period  costs.  Tax  law  also  provides  that 
recurring  expenditures  are  currently  deductible  because  of  the  need 
to  renew  the  benefits  through  additional  expenditures  each  year, 
suggesting  a  useful  life  of  less  than  a  year.  Advertising  generally 
is  considered  a  recurring  expenditure  because  taxpayers  must  regu- 
larly engage  in  advertising  activities  in  order  to  produce  new  busi- 
ness on  a  relatively  consistent  basis  in  each  year. 

There  is  no  tax  incentive  for  engaging  in  advertising  activities, 
nor  is  there  any  other  special  "tax  break"  for  advertising.  Retailers 
engage  in  advertising  on  a  day-to-day  basis  in  order  to  inform  cus- 
tomers about  current  products,  prices,  and  to  bring  customers  into 
our  store.  Hopefully,  this  translates  into  immediate  sales.  The  costs 
of  the  business  activity  of  generating  sales  are  deducted  from  in- 
come in  the  year  incurred  in  order  to  properly  match  the  revenues 
with  expenses  of  generating  the  revenues. 

Other  than  serving  as  a  revenue  raiser,  the  tax  policy  basis  that 
has  been  suggested  for  requiring  the  capitalization  of  a  portion  of 
advertising  expenses  is  that  the  revenue  stream  or  benefit  ven- 
erated from  advertising  extends  to  future  years.  From  a  retailer's 
perspective,  I  can  state  emphatically  that  this  is  not  the  case.  Re- 
tail advertising  is  directed  at  the  sale  of  goods  directly  to  consum- 
ers within  a  short  period  of  time.  The  advertisement  may  announce 
a  sale  of  a  product,  a  special  promotion  associated  with  the  product 
or  the  availability  of  the  product  at  a  particular  store.  In  all  of 
these  cases,  the  goal  is  to  bring  the  customer  into  the  store  during 
the  time  the  sale  or  promotion  is  taking  place.  Again,  the  purpose 
is  to  generate  immediate  sales.  For  example,  a  newspaper  ad  an- 
nouncing the  price  of  chicken  for  the  coming  week  is  designed  to 
bring  customers  into  the  store  during  that  week  to  purchase  chick- 
en. The  advertisement  will  have  no  value  after  that  week. 

Seasonal  advertising  is  similar.  Advertisement  directed  at 
Christmas  sales  clearly  are  directed  at  short-term  results,  as  are 
sales  of  ski  equipment,  bathing  suits,  and  other  items  of  use  only 
during  certain  times  of  the  year.  In  such  cases,  products  that  are 
advertised  for  sale  in  a  particular  store  this  month  may  not  even 
be  offered  for  sale  in  that  store  in  future  years. 

Proposals  to  require  capitalization  of  advertising  expenses  will 
also  add  a  great  deal  of  complexity  to  the  Tax  Code.  The  primary 
reason  for  the  complexity  will  result  from  trying  to  make  deter- 
minations as  to  what  activities  actually  constitute  advertising.  For 
example,  if  an  advertising  agency  is  hired,  are  all  fees  paid  to  the 
agency  considered  to  be  advertising,  or  are  research  and  other  con- 
sulting services  not  advertising?  Are  salaries  paid  to  store  employ- 
ees, who  deal  with  ad  agencies  and  do  other  advertising  and  mar- 
keting activities,  considered  to  be  advertising  costs? 

If  tne  store  puts  its  label  in  a  coat  that  it  sells,  is  that  advertis- 
ing? Is  the  store's  name  on  the  bill  that  it  sends  to  its  credit  card 
customers  advertising?  Are  product  demonstrations  in  the  store  ad- 
vertising? Are  telephone  and  mail  solicitations  advertising? 


1205 

If  advertising  is  broadly  defined,  capitalization  will  be  difficult 
for  the  Internal  Revenue  Service  to  administer.  However,  if  a  nar- 
rower definition  of  advertising  is  used,  then  sellers  of  goods  and 
services  will  be  encouraged  to  switch  to  a  form  of  marketing  that 
is  deductible.  Thus,  the  tax  law  will  influence  sellers  to  use  a  less 
efficient  means  of  marketing. 

In  either  case,  the  issue  of  what  constitutes  "advertising"  will 
lead  to  innumerable  controversies  between  taxpayers  and  the  In- 
ternal Revenue  Service,  leading  to  years  of  litigation.  This  is  ex- 
actly the  opposite  of  the  goals  set  by  this  committee  to  simplify  our 
overly  complex  tax  system. 

In  summary,  the  National  Retail  Federation  opposes  any  pro- 
posal to  restrict  the  deduction  for  advertising  costs.  Retailers  rely 
on  advertising  to  bring  customers  into  our  stores  and  make  sales, 
which  leads  to  stronger  economic  growth.  There  is  no  tax  policy  jus- 
tification for  limiting  a  retailer's  deduction  for  this  cost  of  doing 
business.  This  would  distort  the  basic  premise  of  matching  reve- 
nues and  expenses.  In  addition,  advertising  contributes  to  the  sale 
of  new  and  innovative  products,  which  are  needed  to  keep  our  Na- 
tion competitive.  Finally,  modifying  the  tax  rules  relating  to  adver- 
tising would  add  a  great  deal  of  complexity  to  the  Tax  Code  and 
result  in  innumerable  controversies  between  taxpayers  and  the  IRS 
over  the  definition  of  advertising. 

Mr.  Chairman  and  members  of  the  committee,  I  thank  you  for 
your  time  and  kind  attention. 

[The  prepared  statement  follows:] 


1206 


STATEMENT  OF  DAVID  L.  FEENEY 
NATIONAL  RETAIL  FEDERATION 

Mr  Chairman,  members  of  the  Committee,  my  name  is  David  L  Feeney,  Senior  Vice  President  - 
Corporate  Taxes,  of  the  R  H.  Macy  &  Co.,  Inc    I  am  pleased  to  appear  today  on  behalf  of  the 
National  Retail  Federation  to  express  our  opposition  to  a  proposal  to  capitalize  advertising  costs 
and  amortize  them  over  a  period  of  years. 

By  way  of  background,  the  National  Retail  Federation  is  the  nation's  largest  trade  group  that 
speaks  for  the  retail  industry    The  organization  represents  the  entire  spectrum  of  retailing, 
including  the  nation's  leading  department,  chain,  discount,  specialty  and  independent  stores, 
several  dozen  national  retail  associations  and  all  50  state  retail  associations.  The  Federation's 
membership  represents  an  industry  that  encompasses  over  1.3  million  U.S.  retail  establishments, 
employs  nearly  20  million  people  and  registered  sales  in  excess  of  $1.9  trillion  in  1992. 

The  retail  industry  would  be  severely  harmed  by  a  proposal  to  capitalize  advertising.  Our  industry 
relies  on  advertising  to  bring  customers  into  our  stores  on  a  day-to-day  basis.  This  is  an  ordinary 
and  necessary  cost  of  doing  business  for  retailers.  There  is  no  good  tax  policy  basis  for  denying 
taxpayers  the  ability  to  deduct  these  costs  as  incurred.  It  is  also  bad  economic  policy  to  increase 
our  cost  of  advertising,  which  directly  affects  sales.  The  ripple  effect  on  the  economy  will  be  to 
reduce  production  and  lower  economic  growth 

Advertising  fosters  competition.  When  a  business  advertises  prices  and  quality,  it  forces 
competitors  to  lower  prices  and  increase  quality.  Advertising  is  also  the  means  by  which  new 
products  can  enter  into  a  market.  Increasing  the  cost  of  advertising  will  disproportionately  hurt 
businesses  that  are  trying  to  market  new  products.  The  results  will  be  less  innovation  and  a  drag 
on  U.S.  global  competitiveness. 

Advertising  also  provides  customers  with  an  important  source  of  information  about  products, 
including  price  and  quality.   It  provides  competition  within  the  marketplace,  and  it  also  helps  to 
bolster  consumer  confidence.  With  consumer  confidence  at  its  current  low  point,  our  government 
cannot  afford  to  adopt  a  policy  that  would  be  a  further  detriment  to  consumer  confidence. 
Rather,  stronger  consumer  confidence  is  needed  to  help  generate  an  economic  recovery. 

Increased  advertising  costs  will  have  a  particulariy  harsh  impact  on  financially  troubled  retailers, 
some  of  which  already  may  be  in  bankruptcy.  Businesses  that  are  strapped  for  cash,  and  in 
particular  financially  troubled  retailers,  use  advertising  as  a  means  of  producing  a  quick  boost  in 
sales  to  increase  their  cash  flow.  It  will  be  diflficult  for  these  businesses  to  bear  the  increased  cost 
of  this  advertising. 

Similarly,  increased  advertising  costs  will  be  harmful  to  small  businesses,  and  especially  small 
retailers,  that  rely  on  increased  sales  as  a  result  of  advertising  to  provide  the  basis  for  building 
their  businesses. 

Advertising  Increases  Short-Term  Sales 

Under  current  law,  advertising  costs  generally  are  deducted  in  the  year  incurred  as  a  cost  of 
doing  business.  This  is  the  same  tax  treatment  that  is  given  to  a  myriad  of  other  business  expenses 
that  are  generally  considered  period  costs.  Tax  law  also  provides  that  recurring  expenditures  are 
currently  deductible  because  of  the  need  to  renew  the  benefits  through  additional  expenditures 
each  year,  suggesting  a  useful  life  of  less  than  a  year.  Advertising  generally  is  considered  a 
recurring  expenditure  because  taxpayers  must  regularly  engage  in  advertising  activities  in  order  to 
produce  new  business  on  a  relatively  consistent  basis  in  each  year 


1207 


There  is  no  tax  incentive  for  engaging  in  advertising  activities,  nor  is  there  any  other  special  "tax 
break"  for  advertising.  Retailers  engage  in  advertising  on  a  day-to-day  basis  in  order  to  inform 
customers  about  current  products  and  prices  and  bring  customers  into  our  stores.  Hopefully,  this 
translates  into  immediate  sales.  The  costs  of  the  business  activity  of  generating  sales  are  deducted 
from  income  in  the  year  incurred  in  order  to  match  revenue  with  the  expenses  of  generating  the 
revenue. 

Other  than  serving  as  a  revenue  raiser,  the  tax  policy  basis  that  has  been  suggested  for  requiring 
the  capitalization  of  a  portion  of  advertising  expenses  is  that  the  revenue  stream  or  benefit 
generated  from  advertising  extends  to  future  years.  From  a  retailer's  perspective,  I  can  state 
emphatically  that  is  not  the  case.  Retail  advertising  is  directed  at  the  sale  of  goods  directly  to 
consumers  within  a  short  period  of  time.  The  advertisement  may  announce  a  sale  of  a  product,  a 
special  promotion  associated  with  the  product,  or  the  availability  of  the  product  at  a  particular 
store.  In  all  of  these  cases,  the  goal  is  to  bring  the  customer  into  the  store  during  the  time  that  the 
sale  or  promotion  is  taking  place.  Again  -  the  purpose  is  to  generate  immediate  sales.  For 
example,  a  newspaper  ad  announcing  the  price  of  chicken  for  the  coming  week  is  designed  to 
bring  customers  into  the  store  during  thai  week  to  purchase  chicken  —  the  advertisement  will  have 
no  value  after  that  week.   Seasonal  advertising  is  similar    Advertisements  directed  at  Christmas 
sales  clearly  are  directed  at  short  term  results,  as  are  sales  of  ski  equipment,  bathing  suits,  and 
other  items  of  use  only  during  certain  times  of  the  year    In  some  cases,  products  that  are 
advertised  for  sale  in  a  particular  store  this  month  may  not  even  be  ofiFered  for  sale  in  that  store  in 
future  years. 

Economic  studies  confirm  that  the  value  of  most  advertising  is  eliminated  within  one  year.  A 
recent  study  co-authored  by  two  Nobel  Laureates  in  economics.  Dr.  Kenneth  J.  Arrow  and  Dr. 
George  G  Stigler,  concludes 

[AJlthough  there  are  a  number  of  economic  studies  that  suggest  that  advertising  is  long- 
lived,  they  are  generally  so  fraught  with  errors  that  one  cannot  rely  on  their  findings. 
When  we  correct  for  some  statistical  problems,  we  find  that  the  estimated  duration 
intervals  are  much  shorter  than  originally  thought.  Moreover,  there  are  a  number  of 
studies  (particularly  more  recent  ones)  that  suggest  that  advertising  depreciates  so  rapidly 
that  virtually  all  of  its  effects  are  gone  within  a  year.  In  short,  the  economic  evidence  does 
not  support  the  view  that  advertising  is  long-lived.' 

Requiring  Caoitalization  Will  Greatly  Increase  the  Comnlexitv  of  the  Tax  Code 

Proposals  to  require  capitahzation  of  advertising  expenses  will  add  a  great  deal  of  complexity  to 
the  tax  code.  The  primary  reason  for  the  complexity  will  result  from  trying  to  make 
determinations  as  to  what  activities  constitute  advertising  and  what  activities  do  not.  For 
example,  if  an  advertising  agency  is  hired,  are  all  fees  paid  to  the  agency  considered  to  be  for 
advertising,  or  are  research  and  other  consulting  services  not  advertising?  Are  salaries  paid  to 
store  employees  who  deal  with  ad  agencies  and  do  other  advertising  and  marketing  activities 
considered  to  be  advertising  costs?  If  a  store  puts  its  label  in  a  coat  that  it  sells,  is  that 
advertising?  Is  the  store's  name  on  the  bills  it  sends  to  its  credit  card  customers  advertising?  Are 
product  demonstrations  in  the  store  advertising''  Are  telephone  and  mail  solicitations  advertising? 

If  advertising  is  defined  broadly,  capitalization  will  be  difficult  for  the  Internal  Revenue  Service  to 
administer    However,  if  a  narrower  definition  of  advertising  is  used,  then  sellers  of  goods  and 
services  will  be  encouraged  to  switch  to  a  form  of  marketing  that  is  deductible.  Thus,  the  tax  law 
will  influence  sellers  to  use  a  less  efiBcient  means  of  marketing. 

In  either  case,  the  issue  of  what  constitutes  "advertising"  will  lead  to  innumerable  controversies 
between  taxpayers  and  the  Internal  Revenue  Service  —  leading  to  years  of  litigation.  This  is 
exactly  the  opposite  of  the  goals  set  by  this  Committee  to  simplify  our  overiy  complex  tax  system. 


'Kenneth  J.  Arrow,  George  G.  Stigler,  Elisabeth  M.  Landes.  and  Andrew  M  Rosenfield,  Economic  Analysis  of 
Proposed  Changes  in  Tax  Treatment  of  Advertisine  Expenditures.  Lexicon,  Inc.,  Chicago,  April  1990  at  39-40. 


1208 


Conclusion 


In  summary,  the  National  Retail  Federation  opposes  any  proposal  to  restrict  the  deduction  for 
advertising  costs    Retailers  rely  on  advertising  to  bring  customers  into  our  stores  and  make  sales, 
which  leads  to  stronger  economic  growth    There  is  nc  tax  policy  justification  for  limiting  a 
retailer's  deduction  for  this  cost  of  doing  business  This  would  distort  the  basic  premise  of 
matching  revenues  and  expenses  In  addition,  advertising  contributes  to  the  sale  of  new  and 
innovative  products,  which  are  needed  to  keep  our  nation  competitive.  Finally,  modifying  the  tax 
rules  relating  to  advertising  would  add  a  great  deal  of  complexity  to  the  tax  code  and  result  in 
innumerable  controversies  between  taxpayers  and  the  Internal  Revenue  Service  over  the  definition 
of  advertising. 


1209 

Mr.  Payne.  Thank  you  very  much,  Mr.  Feeney. 

Our  next  two  witnesses  will  be  testifying  concerning  the  depre- 
ciation of  assets  in  the  printing  and  publishing  industry.  We  will 
first  hear  fi-om  Mr.  Webber. 

STATEMENT  OF  HOWARD  C.  WEBBER,  JR^  CHAIRMAN, 
COHBER  PRESS,  INC.,  ROCHESTER,  N.Y.,  ON  BEHALF  OF  THE 
PRINTING  INDUSTRIES  OF  AMERICA,  AND  GRAPHIC  ARTS 
LEGISLATIVE  COUNCIL 

Mr.  Webber.  Thank  you.  Mr.  Chairman,  members  of  the  sub- 
committee, mv  name  is  Howard  C.  Webber,  Jr.  I  am  the  chairman 
and  CEO  of  Uohber  Press,  Inc.,  a  58-employee  commercial  printing 
firm  located  in  Rochester,  N.Y.  I  am  a  former  chairman  of  the 
board  of  the  Printing  Industries  of  America,  the  largest  printing 
and  graphic  arts  trade  association  in  the  United  States,  with  over 
14,000  member  companies. 

I  am  appearing  before  you  today  on  behalf  of  the  Graphic  Arts 
Legislative  Council,  a  group  of  national  graphic  arts  associations 
formed  in  1988  to  provide  a  forum  for  addressing  legislative  and 
regulatory  proposals  before  Federal  and  State  government.  The 
council  consists  of  14  associations  representing  every  aspect  of  the 
printing  and  graphic  arts  industry. 

Mr.  Chairman,  it  is  important  to  understand  the  printing  and 
publishing  industry  is  comprised  of  several  key  segments.  Publish- 
ers are  those  companies  which  publish  periodicals,  books,  and  other 
items  but  who  do  not  own  printing  equipment.  Newspaper  publish- 
ers are  those  who  both  publish  and  print  newspapers.  The  remain- 
der of  printing  and  publishing,  or  roughly  half  the  total  of  the  en- 
tire industry,  is  commercial  printing  and  activities  related  to  com- 
mercial printing.  While  these  companies  print  books  and  maga- 
zines, they  also  print  many  newspaper  inserts,  newsletters,  adver- 
tising materials,  labels,  forms,  wedding  invitations,  and  virtually 
every  other  item  where  an  image  is  created  on  some  type  of  sur- 
face. 

Let  me  just  spend  a  moment  describing  today's  commercial  print- 
ing industry.  Commercial  printing  is  the  largest  manufacturing  in- 
dustry in  tne  Nation  in  terms  of  number  of  establishments.  Over 
42,000  firms  generating  $79  billion  in  sales  employ  more  than 
820,000  individuals.  Unlike  many  U.S.  manufacturers  we  have  wit- 
nessed steady  increases  in  productivity  while  watching  employment 
and  average  wages  increase  as  well.  We  also  are  a  net  exporter, 
having  enjoyed  a  favorable  balance  of  trade  for  many  years. 

Mr.  Chairman,  my  comments  today  are  directed  toward  item  No. 
2  under  the  cost  recovery  section  of  the  August  17  press  release 
which  was  a  proposal  to  extend  the  recovery  period  applicable  to 
certain  assets  used  in  printing  and  publishing  to  10  years.  As  I  un- 
derstand the  proposal,  it  would  shift  equipment  which  is  today  on 
a  7-year  depreciation  schedule,  including  press  equipment,  bindery 
equipment  and  certain  prepress  equipment  such  as  electronic  scan- 
ners, to  a  10-year  schedule. 

I  must  tell  you,  in  all  honesty,  that  this  proposal  has  been  met 
with  shock,  disbelief  and  genuine  outrage  by  an  industry  that  is 
still  climbing  back  to  health  after  the  recent  recession.  Because  our 
industry  is  comprised  of  a  high  number  of  small  family-owned  en- 


1210 

terprises,  the  most  successful  of  which  have  already  taken  a  hit 
this  year  from  the  recent  reconciliation  bill  which  increased  the 
rates  of  subchapter  S  corporations,  we  are  already  concerned  about 
generating  the  capital  necessary  to  keep  our  plants  up  to  date  and 
competitive. 

Printing  is  a  capital-intensive  industry  that  has  been  revolution- 
ized in  recent  years  by  rapid  changes  in  technology.  Even  the  cur- 
rent 7-vear  depreciation  schedule  is  often  inadequate  to  allow  for 
the  full  recovery  of  equipment  investments.  Stretching  the  depre- 
ciation schedule  out  to  10  years  not  only  fails  to  take  into  account 
the  reality  of  today's  printing  environment  but  it  unfairly  singles 
out  our  industry  relative  to  other  American  manufacturers. 

It  used  to  be  we  kept  a  printing  press  for  8  to  10  years  and  only 
replaced  it  because  it  wore  out.  Today,  however,  we  replace  our 
equipment  in  5  to  7  years,  primarily  because  new  technologies  are 
constantly  evolving.  Investing  in  this  new  technology  can  give  a 
printer  a  competitive  edge  in  a  particular  market  segment. 

In  view  of  the  rapid  changes  in  technology,  any  changes  in  the 
depreciation  schedule  for  our  industry  should  be  geared  toward  re- 
ducing the  term  such  as  a  5-year  schedule  used  in  Grermany  rather 
than  increasing  the  schedule  far  beyond  the  useful  life  of  a  product. 
However,  we  do  not  come  to  Congress  to  propose  a  shorter  depre- 
ciation schedule.  In  fact,  the  commercial  printing  industry  has 
never  approached  this  committee  for  a  tax  break  or  a  special  pro- 
gram. 

Instead,  someone  in  Congress  took  it  upon  themselves  to  suggest 
a  change  in  our  depreciation  solely  based  upon  the  need  for  in- 
creased Federal  revenue  rather  than  out  of  any  interest  to  adjust 
the  schedules  to  economic  reality.  If  the  proposal  were  part  of  a 
broad  review  of  depreciation  schedules  for  all  industry,  we  would 
be  happy  to  make  our  case  for  retaining  the  present  schedules,  but 
on  this  issue  printing  has  been  singled  out  as  the  only  industry  to 
take  a  direct  hit,  and  the  proposed  changes  have  nothing  to  do  with 
the  actual  use  of  equipment  in  our  plants  today. 

Contrary  to  the  predictions  of  many,  the  market  for  printed  prod- 
ucts is  larger  than  ever  and  shows  every  indication  of  continuing 
steady  growth  well  into  the  future.  Remember  the  paperless  office? 
If  your  office  is  anything  like  mine,  it  has  more  paper  in  it  today 
than  ever  before.  Yes,  much  of  it  is  photocopied,  but  even  with  the 
tremendous  growth  in  photocopying,  demand  for  printing  has  con- 
tinued to  grow.  Many  predicted  that  the  advent  of  the  personal 
computer  would  mark  the  end  of  traditional  printing,  yet  imagine 
a  book  store  today  without  computer  magazines  and  books  and 
imagine  your  PC  without  volumes  of  software  manuals  and  instruc- 
tion material,  all  of  it  printed  by  our  industry.  The  advent  of  the 
computer  age  has  resulted  in  more  printing,  not  less. 

The  greatest  impact  of  these  new  technologies  on  printing  has 
been  the  way  the  technologies  themselves  have  been  utilized  in  the 
printing  process.  The  computer  chip  is  now  an  integral  part  of  al- 
most every  new  piece  of  equipment  in  the  industry.  As  new  mar- 
kets for  printed  material  develop,  competition  for  the  latest  press 
technology  to  enable  a  printer  to  maintain  a  competitive  edge 
grows  sharper. 


1211 

At  a  time  when  this  industry  is  growing  at  a  rate  faster  than  the 
gross  national  product  and  when  we  are  enjoying  a  favorable  trade 
balance,  this  committee  should  be  taking  steps  to  urge  us  to  ex- 
pand, not  contract.  In  the  name  of  the  42,000  small  firms  making 
up  this  industry,  we  urge  you  not  to  ask  the  printing  industry  to 
slow  its  growth  solely  for  additional  revenue. 

Mr.  Chairman,  I  have  attached  a  chart  on  the  next  page  which 
you  have,  I  believe,  which  demonstrates  the  effect  of  the  proposed 
change  on  printers  of  varying  size. 

I  want  to  thank  you  for  this  opportunity  to  appear  before  you 
today.  Thank  you. 

[The  statement  and  attachment  follow:] 


1212 


STATEMENT  OF  HOWARD  C.  WEBBER,  JR.,  ON  BEHALF  OF  PRINTING 
INDUSTRIES  OF  AMERICA,  AND  GRAPHIC  ARTS  LEGISLATIVE  COUNCIL 

Mr.  ChaiiTOan,  memben  of  the  Subcommittee,  my  name  is  Howard  C.  Webber,  and  I  am  the 
chainnan  and  chief  executive  ofRca  of  Cohbo-  Press,  Inc.,  a  58  employee  commercial  printing 
firm  located  in  Rochester,  New  York.  I  am  a  foimer  Chainnan  of  the  Board  of  Printing 
Industries  of  Amoica,  the  largest  printing  and  graphic  arts  trade  association  in  the  United  States 
with  ova- 14,000  member  companies. 

I  am  appearing  before  you  today  on  behalf  of  the  Graphic  Aits  Legislative  Council  (GALQ,  a 
group  of  national  graphic  aits  associations  formed  in  1988  to  provide  a  forum  for  addressing 
legislative  and  regulatory  proposals  before  federal  and  state  government.  The  Council  consists 
of  14  associations  representing  every  aspect  of  the  printing  and  gr^hic  aits  industry. 

Mr.  Chairman,  it  is  important  to  understand  that  the  "printing  and  publishing  industry"  is 
comprised  of  several  key  segments.  Publishers  are  those  companies  which  publish  periodicals, 
books,  and  otha  items  but  who  do  not  own  printing  equipment.  Newspaper  publishers  are  those 
who  both  publish  and  print  newspapers.  The  remainder  of  "printing  and  publishing,"  or  roughly 
half  the  total  of  the  entiie  industry,  is  commercial  printing  and  activities  related  to  commaxnal 
printing.  While  these  companies  print  books  and  magazines,  they  also  print  many  newspaper 
insots,  newsletters,  advertising  materials,  labels,  forms,  wedding  invitations,  and  virtually  every 
other  item  where  an  image  is  created  on  some  type  of  surface. 

L^  me  spend  a  moment  describing  today's  commercial  printing  industry.  Commercial  printing 
is  the  largest  manufacturing  industry  in  the  nation  in  terms  of  numbers  of  establishments.  Over 
42,000  firms  generating  $79  billion  in  sales  employ  more  than  820,000  individuals.  Unlike  many 
U.S.  manufacturers,  we  have  witnessed  steady  increases  in  productivity  while  watching 
anployment  and  average  wages  increase  as  weU.  We  are  also  a  net  exporter,  having  enjoyed  a 
favorable  balance  of  trade  for  many  years. 

Mr.  Chairman,  my  comments  today  are  directed  toward  item  number  2  under  the  cost  recovery 
section  of  the  August  17  press  release  which  was  "a  proposal  to  extend  the  recovery  period 
q>plicable  to  certain  assets  used  in  printing  and  publishing  to  10  years."  As  I  understand  this 
proposal,  it  would  shift  equipment  which  is  today  on  a  7  year  deineciation  schedule,  including 
press  equipment,  bindery  equipment  and  certain  prepress  equipment  such  as  electronic  scanners 
to  a  10  year  schedule. 

I  must  tell  you  in  all  honesty,  that  this  proposal  has  been  met  with  shock,  disbelief,  and  genuine 
outrage  by  an  industry  that  is  still  climbing  back  to  health  after  the  recent  recession.  Because 
our  industry  is  comprised  of  a  high  number  of  small  family-owned  enterprises,  the  most 
successful  of  which  have  already  taken  a  hit  this  year  from  the  recent  reconciliation  bill  which 
increased  the  rates  on  Subch^>ter  S  corporations.  We  are  aheady  concerned  about  generating 
the  capital  necessary  to  ke^  our  plants  up  to  date  and  competitive. 

Printing  is  a  cental  intensive  industry  that  has  been  revolutionized  in  recent  yeais  by  rapid 
changes  in  technology.  Evea  the  current  7-year  depreciation  schedule  is  often  inadequate  to 
allow  for  the  fuU  recovoy  of  equipmoit  investments.  Stretching  the  depreciation  period  out  to 
10  years  not  only  fails  to  take  into  account  the  reality  of  today's  printing  environment,  but  it 
unfairly  singles  out  our  industry  relative  to  other  American  manufactures. 

It  used  to  be  that  we  kept  a  printing  press  for  8-10  years  and  only  replaced  it  because  it  wore  out 
Today,  however,  we  replace  our  equipment  in  5-7  years  primarily  because  new  technologies  are 
constantly  evolving.  Investing  in  this  new  technology  can  give  a  printer  a  competitive  edge  in 
a  particular  market  segment  In  view  of  the  rapid  changes  in  technology,  any  changes  in  the 
dqjreciation  schedule  for  our  industry  should  be  geared  toward  reducing  the  term,  such  as  the 
five  year  schedule  used  in  Germany,  rather  than  increasing  the  schedule  far  beyond  the  useful 
life  of  a  product 

However,  we  did  not  come  to  Congress  to  propose  a  shorter  depreciation  schedule.  In  fact,  the 
corrmiercial  printing  industry  has  never  ^jproached  this  conmiittee  for  a  tax  break  or  special 
program.  Instead  someone  in  Congress  took  it  upon  themselves  to  suggest  a  change  in  our 
depreciation  solely  based  on  the  need  for  increased  federal  revenue  rather  than  out  of  any  interest 
to  adjust  the  schedules  to  economic  reality.    If  the  proposal  were  part  of  a  broad  review  of 


1213 


depreciation  schedules  for  all  industry,  we  would  be  happy  to  make  our  case  for  retaining  the 
present  schedules.  But  on  this  issue,  printing  has  been  singled  out  as  the  only  industry  to  take 
a  direct  hit  and  the  proposed  changes  have  nothing  to  do  with  the  actual  use  of  equipment  in  our 
plants  today. 

Contraiy  to  the  predictions  of  many,  the  market  for  printed  products  is  largo-  than  ever,  and 
shows  every  indication  of  continuing  steady  growth  well  into  the  future.  Remembe-  the 
"pEqierless  office?"  If  your  office  is  anything  like  mine,  it  has  more  papa  in  it  today  than  ever 
before.  Yes,  much  of  it  is  photocopied.  But  even  with  the  tremendous  growth  in  photocopying, 
demand  for  printing  has  continued  to  grow.  Many  predicted  that  the  advent  of  the  personal 
computer  would  mark  the  end  of  traditional  printing.  Yet  imagine  a  bookstore  today  without 
computer  related  magazines  and  books  and  imagine  your  PC  without  volumes  of  software 
manuals  and  instructional  material,  all  of  it  printed  by  our  industry.  The  advent  of  the  computer 
age  has  resulted  in  more  printing,  not  less. 

The  greatest  impact  of  these  new  technologies  on  printing  has  been  the  way  the  technologies 
themselves  have  been  utilized  in  the  printing  process.  The  computer  chip  is  now  an  integral  part 
of  almost  evoy  new  piece  of  equipment  in  the  industry.  As  new  markets  for  printed  material 
develop,  competition  for  the  latest  press  technology  to  enable  a  printer  to  maintain  a  competitive 
edge  grows  sharper. 

At  a  time  when  this  iiufaistry  is  growing  at  a  rate  faster  than  the  Gross  National  Product  and 
when  we  are  enjoying  a  favorable  trade  balance,  this  committee  should  be  taking  st^M  to  urge 
us  to  expand,  not  contract.  In  the  name  of  the  42,000  small  firms  making  up  this  industry,  we 
urge  you  not  to  ask  the  printing  industry  to  slow  its  growth  solely  for  additional  revenue. 

Mr.  Chairman,  I  have  attached  a  chart  on  the  next  page  which  demonstrates  the  effiect  of  the 
proposed  change  on  printers  of  varying  size.  I  want  to  thank  you  for  this  opportunity  to  ^>pear 
before  you  today. 


Members  of  the  Graphic  Arts  Legislative  Council  include:  Book  Manufacturers '  Institute,  bic. 
Envelope  Manufacturers  Association  of  America,  Flexographic  Technical  Association,  Inc.,  Foil 
Stamping  and  Embossing  Association,  bttemational  Association  ofDiecutting  and  Diemaking, 
baemational  Prepress  Association,  bttemational  Reprographic  Association,  National  Association 
of  Printers  and  Lithographers,  National  Association  of  Printing  bik  Manufacturers,  bic..  National 
Association  of  Quick  Printers,  bic..  North  American  Graphic  Arts  Suppliers  Association,  Printing 
Industries  of  America,  bu:..  Research  and  Engineering  Coundl  of^  Graphic  Arts  bidustry,  bic 
and  Typographers  bttemational  Association. 


Mr.  Howard  C  Webber,  Jr.  Graphics  Arts  Legislative  Council 

Cohber  Press,  bK.  c/o  Printing  Industries  of  America 

1000  John  Street  100  Daingerfield  Road 

P.O.  Box  93100  Alexandria,  VA  22314 

Rochester,  NY  14692  Contact:  Benjamin  Y.  Cooper 

(716)  475-9100  (703)  519-8158 


77-130  0-94 -7 


1214 


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1215 

Mr.  Payne.  Thank  you,  Mr.  Webber. 

Our  last  witness,  representing  the  Association  for  Supphers  of 
Printing  and  Publishing  Technologies,  is  Mark  Nuzzaco,  director  of 
government  affairs. 

STATEMENT  OF  MARK  J.  NUZZACO,  DIRECTOR  OF  GOVERN- 
MENT AFFAIRS,  NPES,  THE  ASSOCIATION  FOR  SUPPLIERS 
OF  PRINTING  AND  PUBLISHING  TECHNOLOGIES 

Mr.  Nuzzaco.  Thank  you.  Good  afternoon.  My  name  is  Mark 
Nuzzaco.  I  am  director  of  government  affairs  for  NPES,  the  Asso- 
ciation for  Suppliers  of  Printing  and  Publishing  Technologies. 

We  thank  tne  chairman  and  subcommittee  tor  the  opportunity  of 
appearing  before  the  subcommittee  to  comment  on  a  proposed 
change  in  the  tax  law  extending  to  10  years  the  recovery  period  for 
certain  assets  used  in  printing  and  publishing.  We  feel  that  such 
a  change  would  be  very  detrimental  to  the  economic  recovery  and 
long-term  vitality  of  our  industry  and  our  customers. 

My  full  statement,  which  has  been  submitted  for  the  record, 
elaborates  on  our  opposition  to  this  proposal.  For  purposes  of  to- 
day's hearing,  I  will  summarize  our  concerns. 

Before  beginning  my  comments,  I  would  like  to  acknowledge  that 
I  am  pleased  to  share  the  witness  table  today  with  Mr.  Webber, 
chairman  of  Cohber  Press,  Rochester,  N.Y.,  representing  our  sister 
association,  Printing  Industries  of  America,  which  is  comprised  of 
thousands  of  our  members'  customers,  and  the  Graphics  Arts  Leg- 
islative Council.  In  light  of  the  subcommittee's  full  agenda,  my  re- 
marks are  intended  to  complement  Mr.  Webber's  testimony. 

NPES  represents  approximately  300  companies  which  account 
for  about  90  percent  of  domestic  production  of  printing  and  publish- 
ing technology.  Nearly  60  percent  of  NPES's  members  are  small 
businesses  with  gross  sales  of  $5  million  or  less. 

The  printing  and  publishing  technologies  industry  provides  an 
enormous  variety  of  products  and  supplies  to  meet  the  needs  of  the 
printing  and  publishing  industry  and  its  many  segments.  It  is  an 
arena  in  which  societal  trends,  fast-moving  technology  and  intense 
competition  are  all  helping  to  shape  the  future. 

The  most  obvious  of  the  assets  used  in  this  industry,  printing 
presses,  represent  just  one  stage  in  the  long  and  technically  com- 
plex task  of  transforming  ideas  into  printed  materials.  However, 
many  other  technologically  sophisticated  products  are  also  em- 
ployed in  the  industry. 

The  total  market  for  printing  equipment  in  1992  approached  $2.1 
billion  in  orders  and  was  slightly  over  $2.1  billion  in  product  ship- 
ments. The  relatively  modest  size  of  the  printing  and  publishing 
technologies  industry  belies  its  critical  role  in  supporting  the  much 
larger,  crucially  important  graphics  communication  industry  that 
has  been  described  by  Mr.  Webber. 

Until  just  a  few  years  ago,  most  information  was  disseminated 
by  publications  that  were  printed  by  one  of  four  major  printing 
processes.  Today,  however,  we  are  witnessing  a  broad  expansion  of 
communicational  alternatives,  largely  based  on  rapidly  changing 
technologies. 

The  proposal  to  extend  to  10  years  the  recovery  period  for  certain 
assets  used  in  printing  and  publishing  is  detrimental  to  the  graphic 


1216 

communication  industry's  need  for  improved  quality  and  productiv- 
ity. Currently,  assets  used  in  printing  and  publishing  are  defined 
to  have  an  11-year  class  life  and  are  in  the  7-year  modified  acceler- 
ated cost  recovery  system  class  for  depreciation.  These  assets  would 
include  printing  presses  and  machinery  used  in  the  bindery. 

In  light  of  the  new  technological  changes  to  this  traditional 
equipment,  even  the  current  7-year  depreciation  period  exceeds  the 
commercial  life  of  much  of  this  machinery.  Extending  the  capital 
cost  recovery  period  by  nearly  another  50  percent  to  10  years  would 
clearly  be  the  wrong  policy  to  adopt  at  a  critical  point  in  the  indus- 
try's recovery  from  the  economic  downturn  we  have  just  endured. 

Historically,  the  industry  has  had  an  electromechanical  orienta- 
tion. However,  in  1979  the  technological  revolution  began  in  the 
graphics  arts  industry  with  introduction  of  the  color  electronic 
prepress  system.  With  this  product  computers  were  introduced  to 
the  printing  process,  and  that  change  more  than  any  other  caused 
a  fundamental  change  in  the  printing  and  publishing  industry.  Be- 
fore this  era  in  the  mid  1970s,  printing  press  speeds  were  just  one- 
third  of  today's  top  speeds  of  over  3,000  feet  per  minute.  It  took  10 
years  to  increase  from  1,000  to  1,500  feet  per  minute.  But  speeds 
have  doubled  to  over  3,000  feet  per  minute  in  just  the  last  7  years. 

Clearly,  the  rate  of  change  is  increasing  dramatically.  At  such 
speeds,  computerized  controls  were  required. 

At  the  same  time,  the  1980s  witnessed  the  color  revolution  in  the 
printing  and  publishing  industry.  Advertisers  demanded  more  and 
higher  quality  color.  This  color  revolution  fueled  rapid  growth  in 
the  printing  market  and  demanded  new  and  more  sophisticated 
technology. 

As  rapidly  as  press  technolo^  is  changing,  innovation  in  the 
prepress  area  is  occurring  even  faster.  The  conversion  from  analog 
to  digital  data  use  is  an  underlying  cause  of  the  change.  This  tran- 
sition is  forcing  vendors  to  focus  on  the  development  and  sale  of 
discreet  products  that  can  be  indiscriminately  interchanged  by  the 
user. 

This  situation  is  similar  to  what  has  already  happened  in  the 
electronic  office  environment.  As  we  have  continued  to  see  in  the 
"plug  and  play"  environment  of  the  electronic  office,  standards- 
based  prepress  products  will  also  require  more  frequent  revision 
and/or  replacement,  thus  requiring  routine  upgrade  to  stay  com- 
petitive. 

As  long  as  printers  have  been  putting  ink  to  paper,  the  quest  for 
greater  output  and  better  quality  witn  fewer  man  hours  and  re- 
duced waste  has  been  the  driving  force  for  every  press  manufac- 
turer. Today's  technologies  have  taken  this  quest  to  even  a  new 
level.  Today's  increasingly  rapid,  technological  advances  are  yield- 
ing faster  production  speeds,  quicker  make-readies,  reduced  run- 
ning and  make-ready  waste,  better  flexibility  and  quality  over  a 
range  of  jobs,  less  downtime  and,  more  importantly,  the  ability  to 
compete  better  with  other  communications  vehicles. 

New  orders  for  printing  equipment  are  expected  to  rise  12  per- 
cent this  year  and  6  percent  in  1994.  Shipments  of  imaging  and 
prepress  equipment  systems,  in  essence,  computers  and  the  soft- 
ware needed  to  run  them,  are  expected  to  rise  about  10  percent 
this  year  and  8  percent  in  1994.  While  these  are  respectable  gains. 


1217 

they  lag  far  behind  the  15  to  20  percent  growth  rates  of  the  com- 
puter industry  generally.  This  is  because  the  technological  revolu- 
tion is  incompletely  implemented  in  the  printing  industry  because 
of  a  lack  of  cash  flow  and  ability  to  borrow,  especially  by  smaller 
printing  companies. 

Capital  spending,  after  getting  off  to  a  good  start  in  the  first 
quarter,  abruptly  reversed  course  when  the  Clinton  administration 
announced  it  would  not  reinstate  the  investment  tax  credit  after 
all.  Although  the  provision  of  the  Omnibus  Budget  Reconciliation 
Act  of  1993  increasing  the  expenses  deduction  for  small  businesses 
from  $10,000  to  $17,500  is  helpful,  its  incentive  for  investment  will 
be  severely  eroded  by  the  extension  of  the  depreciation  period  to  10 
years  as  called  for  in  this  proposal. 

Rather  than  impeding  investment,  especially  productivity-im- 
proving capital  expenditures  by  small  businesses,  Congress  should 
be  looking  for  ways  to  encourage  capital  formation  and  investment 
in  new  technologies  necessary  for  a  revitalized  industrial  infra- 
structure. 

Mr.  Chairman,  we  respectfully  urge  you  to  adopt  such  a  course, 
and  reject  the  current  proposal.  We  thank  you  for  the  opportunity 
to  present  these  comments.  I  would  be  pleased  to  answer  any  ques- 
tions or  submit  additional  information  for  the  record. 

Thank  you. 

[The  prepared  statement  follows:] 


1218 

STATEMENT  BY 

MARK  J.  NUZZACO 

DIRECTOR  OF  GOVERNMENT  AFFAIRS 

NPES  THE  ASSOCIATION  FOR  SUPPLIERS  OF  PRINTING  AND  PUBLISHING 
TECHNOLOGIES 

BEFORE  THE 

SUBCOMMITTEE  ON  SELECT  REVENUE  MEASURES 

OF  THE 

COMMITTEE  ON  WAYS  AND  MEANS 

UNITED  STATES  HOUSE  OF  REPRESENTATIVES 

SEPTEMBER  8,  1993 


I.         INTRODUCTION 

Good  Morning.   My  name  is  Mark  J.  Nuzzaco.   I  am  Director  of  Government  Affairs 
for  NPES  The  Association  for  Suppliers  of  Printing  and  Publishing  Technologies.    I  am  here 
today  representing  the  thousands  of  women  and  men  who  comprise  a  basic  industry  that  is 
part  of  our  nation's  industrial  backbone.    On  their  behalf  I  thank  you  Mr.  Chairman  for  the 
opportunity  of  appearing  before  the  Subcommittee  on  Select  Revenue  Measures  to  comment 
on  a  proposed  change  in  the  tax  law  extending  to  ten  years  the  recovery  period  for  certain 
assets  used  in  printing  and  publishing.   We  feel  that  such  a  change  would  be  very  detrimental 
to  the  economic  recovery  and  long-term  vitality  of  our  industry.    My  full  statement,  which 
has  been  submitted  for  the  record,  elaborates  on  our  opposition  to  this  proposal.    For  the 
purpose  of  today's  hearing  I  will  summarize  our  concerns. 

Before  beginning  my  comments,  I  would  also  like  to  acknowledge  that  I  am  pleased 
to  share  the  witness  table  today  with  Mr.  Howard  C.  Webber,  Jr.,  President,  Cohber  Press, 
Rochester,  N.Y.,  representing  our  sister  association  Printing  Industries  of  America,  which  is 
comprised  of  thousands  of  our  members'  customers,  and  the  Graphic  Arts  Legislative 
Council.   In  light  of  the  Subcommittee's  full  agenda,  my  remarks  are  intended  to  compliment 
Mr.  Webber's  testimony. 

A.  NPES  The  Association  for  Suppliers  of  Printing  and  Publishing  Technologies 

NPES  The  Association  for  Suppliers  of  Printing  and  Publishing  Technologies  is  a 
national  trade  association  whose  member  companies  are  engaged,  within  the  United  States,  in 
building,  manufacturing,  repairing,  selling,  importing  for  sale,  or  distributing  printing  and 
publishing  technologies  used  in  the  graphic  communications  industries.    NPES  membership 
currently  stands  at  approximately  300  companies  which  account  for  about  90%  of  domestic 
production  of  printing  and  publishing  technologies.    Nearly  60%  of  NPES  members  are  small 
businesses  with  gross  sales  of  $5  million  or  less  annually. 

B.  The  Printing  and  Publishing  Technologies  Industry 

America's  graphic  communications  industry  requires  an  enormous  variety  of  products 
to  do  its  work.   The  printing  and  publishing  technologies  industry  provides  the  products  and 
supplies  that  meet  the  needs  of  the  printing  and  publishing  industry  and  its  many  segments. 
These  segments  include  commercial  printing,  corporate  publishing,  magazines  and 
periodicals,  newspapers,  book  printing  and  publishing,  business  forms,  packaging,  specialty 
printing,  trade  services,  graphic  design  houses,  advertising  agencies  and  desktop  publishers 
using  lithographic,  letterpress,  flexographic,  gravure,  screen,  and  non-impact  processes.   It  is 


1219 


an  arena  in  which  societal  trends,  fast-moving  technology,  and  intense  competition  are  all 
helping  to  shape  the  future. 

The  most  obvious  of  the  assets  used  in  this  industry,  printing  presses,  represent  just 
one  stage  in  the  long  and  technically  complex  task  of  transforming  ideas  into  printed 
materials.    Every  printing  job,  from  the  simplest  to  the  most  elaborate,  goes  through  the 
same  basic  processes:  prepress,  press,  and  bindery. 

The  products  employed  in  the  printing  industry  include  typesetting  systems,  page 
composition  systems,  negative  and  plate-making  equipment,  presses  of  all  types,  press 
accessories  and  binding  and  finishing  apparatus.    Printing  supplies  include  papers,  films, 
plates,  and  chemicals  for  photo  typesetting  and  other  prepress  functions. 

Printing  Trades  Machinery  (SIC  3555)  is  identifiable  as  a  discrete  category  within  the 
more  general  classification  of  Special  Industry  Machinery  of  the  Department  of  Commerce's 
Standard  Industrial  Classifications  System  (SIC).  The  total  market  for  printing  equipment  in 
1992  approached  $2.1  billion  in  orders  and  was  over  $2.1  billion  in  product  shipments. 

The  graphics  arts  supplies  portion  of  the  industry  is  less  readily  identified,  as  these 
products  typically  are  not  aggregated  as  a  separate  group,  but  are  spread  across  several 
broader  industry  categories,  such  as  chemicals  and  photographic  supplies. 

C.        America's  Graphic  Communications  Industry 

The  relatively  modest  size  of  the  printing  and  publishing  technologies  industry  belies 
its  critical  role  in  supporting  the  much  larger,  crucially  important  graphic  communications 
industry.    With  establishments  in  virtually  every  town  and  county,  products  of  the  U.S. 
printing  and  publishing  industry  serve  the  country's  diverse  communication  needs. 
According  to  the  1992  Census  of  Manufacturers,  of  the  20  major  manufacturing  groups 
included  in  the  SIC,  printing  and  publishing  ranks  third  in  the  number  of  establishments. 
There  are  more  than  60,000  printing  establishments  nationwide,  employing  some  1.55 
million  people. 

'      Until  just  a  few  years  ago  most  publications  were  printed  by  one  of  the  four  major 
printing  processes  (offset  lithography,  gravure,  flexography,  and  letterpress).    That  being  the 
case,  the  industry's  users,  vendors,  technologies  and  products  were  focused  on  the  printing 
process  and  meeting  its  requirements. 

Today,  however,  we  are  witnessing  a  significant  industry  refocus  from  printing  to 
publishing,  which  will  also  include  the  broad  world  of  communications  by  later  in  the 
decade.    As  a  result,  in  addition  to  printing,  many  of  the  same  publications  may  be:  1) 
reproduced  by  a  xerographic  electronic  publishing  system;  2)  provided  as  an  electronic 
database  (for  example:  airline  scheduling,  legal  records,  etc.);  and/or  3)  distributed  on 
magnetic  media  (for  example:  CD-ROM).   This  "non-traditional"  focus  represents  a 
substantial  shift  in  the  industry's  perspective,  made  possible  due  to  a  wide  range  of  factors. 
This  broad  expansion  of  communication  alternatives,  largely  based  on  rapidly  changing 
technologies,  offers  both  major  challenges  and  opportunities  for  traditional  printers  and  their 
suppliers. 


1220 


n.        THE  PROPOSAL  TO  EXTE^fD  TO  TEN  YEARS  THE  RECOVERY  PERIOD 
FOR  CERTAIN  ASSETS  USED  IN  PRINTING  AND  PUBLISHING  IS 
DETRIMENTAL  TO  THE  GRAPHIC  COMMUNICATION  INDUSTRY'S  NEED 
FOR  IMPROVED  QUALITY  AND  PRODUCTIVITY 

Currently,  assets  used  in  printing  and  publishing  are  defined  to  have  an  11  year  class 
life  and  are  in  the  7-year  MACRS  class  for  depreciation.   These  assets  would  include 
printing  presses,  and  machinery  used  in  the  bindery.    In  light  of  the  new  technological 
changes  to  this  traditional  equipment,  even  the  current  7-year  depreciation  period  exceeds  the 
commercial  life  of  most  of  this  machinery.   Extending  the  capital  cost  recovery  period  by 
nearly  another  50%  to  ten  years  would  clearly  be  the  wrong  policy  to  adopt  at  a  critical  point 
in  the  industry's  recovery  from  the  economic  downturn  we  have  just  endured.   To  help  put 
this  in  context,  let  me  tell  you  about  the  rapidly  changing  nature  of  the  technology  at  issue. 

A.  Printing  and  Publishing  and  the  Increasingly  Competitive  Communications 
Market 

There  are  a  number  of  trends  shaping  the  outlook  for  the  printing  and  publishing 
industry.  A  major  factor  is  the  impact  of  electronic  technologies  on  the  use  of  printing 
materials.    In  entertainment  we  have  interactive  video.   In  advertising  we  have  multi-media 
and  cable  TV.   In  the  business  marketplace  we  have  digital  technologies,  multi-media  and 
interactive  video.   The  same  products  impact  the  education  and  research  arena.    Not  long  ago 
print  was  the  sole  domain  of  communication.   Then  came  radio,  TV,  cable  and  today  we 
have  multi-media,  digital  data  bases,  CD  Rom  and  other  technologies  that  all  compete  with 
printing  and  publishing. 

B.  The  Eighties  -  A  Decade  of  Rapid  Technological  Change 

The  printing  and  publishing  industry  is  a  bit  of  a  paradox.    It  is  an  old,  mature 
industry  on  the  one  hand.    But  on  the  other  hand,  it's  an  industry  facing  rapid  technological 
change  mainly  due  to  the  adoption  of  computer  technology  to  a  craft-oriented  process. 

Historically,  the  industry  has  had  an  electromechanical  orientation.  Phototypesetting 
was  the  predominant  way  to  prepare  text  for  printing.   Graphic  arts  cameras  and,  to  a  certain 
degree,  analog  scanners  were  in  use  to  digitize  photographic  images  for  printing.   However 
in  1979  a  company  called  Scitex  launched  a  new  product,  the  color  electronic  prepress 
system  and  began  a  technological  revolution  in  the  graphic  arts  industry.   With  this  product, 
computers  were  introduced  to  the  printing  process  and  that  change,  more  than  any  other, 
caused  a  fundamental  change  in  the  printing  and  publishing  industry.   In  addition  to  the 
introduction  of  the  color  electronic  prepress  system,  a  number  of  other  major  innovations 
happened  in  the  1980's  that  had  a  dramatic  impact  on  the  industry. 

Before  this  era,  in  the  mid-1970's  printing  press  speeds  were  just  one-third  of  today's 
top  speeds  of  over  3,000  feet  per  minute.  It  took  ten  years  to  increase  from  1,000  to  1,500 
feet  per  minute.  But  speeds  have  doubled  to  over  3,000  feet  per  minute  in  just  the  last  seven 
years.  Cleariy,  the  rate  of  change  is  increasing  dramatically.  At  such  speeds,  computerized 
controls  were  required  so  that  register  was  maintained  throughout  the  run  length  and  that 
quality  could  be  insured  from  impression  #1  to  the  final  impression  on  the  job.  Automation 
of  press  equipment  was  the  means  that  allowed  these  increased  press  speeds.   Similarly, 


1221 


automation  in  the  bindery  improved  the  throughput,  so  that  the  entire  printing  process  from 
"cradle  to  grave"  was  much  faster,  efficient  and  reliable. 

Two  other  product  introductions  in  the  mid  1980's  continued  the  rapid  revolution  in 
the  printing  industry:  the  laser  printer  and  Postscript.   These  two  introductions  changed  the 
way  images  and  text  were  prepared  for  printing.   In  combination  with  a  software  program  by 
Aldus  Corporation  entitled  PageMaker,  these  low-end  (inexpensive)  systems  allowed  a  whole 
new  group  of  individuals  to  create  pages  and  become  involved  in  the  printing  and  publishing 
process.   This  phenomenon  was  called  desktop  publishing  by  Paul  Brainerd,  the  founder  of 
Aldus. 

At  the  same  time  the  80's  witnessed  a  color  revolution  in  the  printing  and  publishing 
industry.  Advertisers  demanded  more  and  higher  quality  color.  The  notion  that  color  sells 
became  the  dominant  theme  in  the  marketing  of  products.  In  order  to  compete  with  network 
TV,  cable  TV  and  other  media,  printers  had  to  produce  higher  quality  color  on  a  consistent 
basis.  In  addition,  the  launching  of  USA  Today  by  the  Gannett  Corporation  brought  color 
into  everyone's  home  or  office  on  a  daily  basis. 

This  color  revolution  fueled  rapid  growth  in  the  printing  market,  and  demanded  new 
and  more  sophisticated  technology.   One  and  two  color  presses  were  no  longer  the  norm. 
Four,  five,  six,  seven  and  in  some  cases  eight-color  printing  presses  were  purchased  by 
printers  all  over  the  country.    At  the  same  time  the  sophisticated  digital  prepress  equipment 
required  to  reproduce  these  quality  color  pages  was  purchased  by  color  trade  shops  and 
certain  printers  and  publishers.    So  the  1980's  began  an  era  of  tremendous  technological 
change  which  continues  today. 

The  fact  of  the  matter  is  that  the  printing  industry  is  evolving  from  a  craft  orientation 
to  a  technology  orientation  at  an  alarming  pace.    In  a  little  over  10  years,  the  industry  has 
gone  from  a  completely  photomechanical  and  electromechanical  orientation  to  one  where 
digital  technology  touches  all  aspects  of  the  process  from  design  through  printing  through 
binding  finishing  and  distribution. 

C.        The  Impact  of  Changing  Prepress  Technology 

As  rapidly  as  press  technology  is  changing,  innovation  in  the  prepress  area  is 
occurring  even  faster.    A  major  reason  for  this  is  the  expanding  role  that  prepress  is  having 
on  information  processing  and  dissemination  and  resulting  new  market  opportunities  that 
encompass  the  broader  worlds  of  publishing  and  communications. 

The  conversion  from  analog  to  digital  data  usage  is  an  underlying  cause  of  prepress 
change.    For  decades  photographic  materials  have  been  the  analog  prepress  standard.   They 
have  enabled  users  to  merge  discrete  elements,  from  virtually  any  origin,  into  a  final  page 
for  platemaking.    Generally  speaking,  digital  products  have  not  been  able  to  provide  this 
standard  environment  to  date. 

However,  with  the  development  of  industry  standards  and  the  evolution  of  products 
that  function  within  a  common  environment,  digital  standardization  will  occur  between  now 
and  the  year  2000,  and  be  adopted  by  the  major  prepress  service  suppliers.   The  adoption  of 
digital  standardization  is  also  a  basic  requirement  for  expanding  the  scope  of  the  prepress 


1222 


market  into  Computer-Based-Publishing  and  communications  market  applications. 

The  transition  to  a  digital  environment  will  result  in  manual  operations  being 
replaced.   The  transition  to  a  digital  standard  will  have  a  significant  effect  on  the  use  of 
certain  types  of  traditional  equipment  and  supplies.    Ultimately  the  analog-to  digital  transition 
will  result  in  new  hardware,  software,  supplies,  and  support  needs. 

Standardization  will  challenge  product  development.  First,  products  will  increasingly 
become  interchangeable.  The  transition  will  force  vendors  to  focus  on  the  development  and 
sale  of  discrete  products  that  can  be  indiscriminately  interchanged  by  the  user.   This  situation 

is  similar  to  what  has  happened  in  the  electronic  office  environment. 

Compounding  the  product  differentiation  challenge  is  the  issue  of  product  life  cycle. 
As  we  have  continued  to  see  in  the  "plug  and  play"  environment  of  the  electronic  office, 
standards-based  prepress  products  will  also  require  more  frequent  revision  and/or 
replacement,  thus  the  need  to  routinely  upgrade  to  stay  competitive. 

D.  The  Beneflts  of  Advanced  Technologies 

For  as  long  as  printers  have  been  putting  ink  to  paper,  the  quest  for  greater  output 
and  better  quality  with  fewer  man  hours  and  reduced  waste  has  been  the  driving  force  for 
every  press  manufacturer.   Today's  new  technologies  have  taken  this  quest  to  a  new  level. 

Take  for  example  one  manufacturer's  development  of  the  continuous  tubular  blanket 
sleeve  which  slides  onto  the  blanket  cylinder  through  the  side  frame  of  the  press,  thereby 
reducing  the  plate  cylinder  gap  to  a  mere  1/16  inch.   The  result  is  economic  and 
environmental  benefits  due  to  significant  paper  savings  as  a  result  of  the  elimination  of  the 
blanket  gap's  non-print  area.    This  and  other  increasingly  rapid  technological  advances  are 
yielding  faster  production  speeds,  quicker  makereadies,  reduced  running  and  makeready 
waste,  better  flexibility  and  quality  over  a  range  of  jobs,  less  downtime,  and  most 
importantly  -  the  ability  to  better  compete  with  other  communication  vehicles. 

E.  The  Challenge  to  Capital  Investment  in  Printing  and  Publishing 
Technologies 

The  NPES  Quarterly  Economic  Forecast,  prepared  by  NPES  consulting  economist, 
Michael  K.  Evans,  reviews  the  general  economic  outlook,  printing  and  publishing  equipment 
ordered  and  supplies  shipments.   The  forecast  is  derived  from  an  econometric  model 
developed  by  Evans  for  NPES.   Based  on  this  model,  new  orders  for  printing  equipment  are 
expected  to  rise  12%  this  year  and  6%  in  1994.    Most  of  the  growth  probably  occurred  in 
the  first  half  of  the  year,  when  prospects  for  economic  growth  seemed  brighter  and  many 
expected  the  investment  tax  credit  to  be  reinstated.    Although  interest  rates  will  remain  low, 
this  has  little  effect  on  capital  spending  during  a  period  when  capacity  utilization  rates  are 
low  and  many  smaller  firms  are  denied  access  to  credit  markets. 

Shipments  of  imaging  and  prepress  equipment  systems,  in  essence  computers  and  the 
software  needed  to  run  them,  are  expected  to  rise  about  10%  this  year  and  8%  in  1994. 
While  these  are  respectable  gains,  they  lag  far  behind  the  15%  to  20%  growth  rates  of  the 


1223 


computer  industry  generally.    The  technological  revolution  is  incompletely  implemented  in 
the  printing  industry  because  of  a  lack  of  cash  flow  and  ability  to  borrow,  especially  by 
smaller  printing  companies. 

Capital  spending,  after  getting  off  to  a  sparkling  start  in  the  first  quarter,  abruptly 
reversed  course  when  the  Clinton  Administration  announced  it  would  not  reinstate  the 
investment  tax  credit  after  all.   Thus  the  combination  of  insufficient  cash  flow  and  weak 
demand  for  customized  printing  will  keep  the  growth  in  shipments  of  imaging  and  prepress 
equipment  at  moderate  rates,  in  spite  of  the  continuing  computer  revolution. 

Although  the  provision  in  the  "Omnibus  Budget  Reconciliation  Act  of  1993" 
increasing  the  expensing  deduction  for  small  businesses  from  $10,000  to  $17,500  during  the 
year  that  the  property  is  purchased  is  helpful,  its  incentive  for  investment  will  be  severely 
eroded  by  the  extension  of  the  depreciation  period  to  ten  years  as  called  for  in  this  proposal. 
Clearly,  Congress  would  be  double-minded  to  adopt  such  a  policy. 

CONCLUSION 

Rather  than  impeding  investment,  especially  capital  expenditures  by  small  businesses, 
Congress  should  be  looking  for  ways  to  encourage  capital  formation  and  investment  in  new 
technologies  necessary  for  a  revitalized  industrial  infrastructure.    Mr.  Chairman,  we 
respectfully  urge  you  to  adopt  such  a  course,  and  thank  you  for  the  opportunity  to  present 
these  comments.    I  would  be  pleased  to  answer  any  questions  or  submit  additional 
information  for  the  record. 


1224 

Mr,  Payne,  Thank  you,  Mr.  Nuzzaco. 

Mr,  Hancock, 

Mr,  Hancock.  Thank  you,  Mr.  Chairman. 

Question  for  Mr.  Nuzzaco  or  Mr,  Webber.  We  have  two  situations 
here  we  are  talking  about.  One  is  a  change  in  the  depreciation 
schedule  on  printing  equipment.  Another  one  is  the  change  in  the 
deduction  for  advertising.  Which  one  of  those  two  will  impact  you 
the  most? 

One  of  them  is  likely  to  put  you  out  of  business.  What  will  the 
two  of  them  do  to  you? 

Mr.  Webber.  I  wouldn't  like  either  of  them,  but  I  am  certain  the 
change  in  advertising  would  be  extremely  harmful  to  the  printing 
industry,  too,  which  relies  heavily  on  the  advertising  industry. 

Mr.  Hancock.  Do  you  estimate  in  your  own  mind  that  requiring 
advertising  amortization  would  be  even  more  serious  to  the  print- 
ing industry  than  the  change  in  depreciation? 

Mr.  Webber.  Yes,  sir,  it  would  be. 

Mr.  Hancock.  Thank  you  very  much. 

Mr.  Webber.  But  they  both  would  be  harmful. 

Mr.  Hancock.  I  don't  know  if  you  are  aware  of  it  or  not,  but  a 
few  months  ago — in  fact,  you  might  want  to  look  it  up — I  think  it 
was  in  Reader's  Digest,  there  was  quite  an  article  about  who  the 
millionaires  really  are.  It  ended  up  saying  that  the  millionaires  are 
people  that  most  people  don't  know  are  millionaires;  they  are  peo- 
ple that  work  60,  70,  80  hours  a  week;  they  are  married;  they  are 
roughly  55  years  old,  been  married  one  time,  and  the  majority  of 
them  own  printing  plants.  I  thought  it  was  interesting. 

I  am  quite  familiar  with  the  printing  industry.  Let's  face  it,  you 
have  to  pump  so  much  money  back  in  for  equipment  in  the  printing 
industry  that  if  you  can  stay  in  it  and  compete,  you  will  end  up 
with  a  pretty  substantial  investment  in  equipment. 

Printing  equipment,  incidentally,  is  also  one  of  our  major  ex- 
ports. King  Press  down  in  my  district  recently  shipped  overseas 
some  web  press  equipment. 

[The  following  was  subsequently  received:] 


1225 


INPCSI 


The  Association  for  Suppliers  of 
Printing  and  Publishiing  Technologies 

0(y  Years  of  Service —1993 


September  14,  1993 


The  Honorable  Mel  D.  Hancock 
U.S.  House  of  Representatives 
Washington,  DC  20515 


Dear  Congressman  Hancock: 


I  am  writing  to  supplement  formal  testimony  given  by  me  on  behalf  of  NPES  The 
Association  for  Suppliers  of  Printing  and  Publishing  Technologies  before  the  House  Ways 
and  Means  Subcommittee  on  Select  Revenue  Measures  on  September  8,  1993.   I  was  a 
member  of  panel  number  four  that  day,  and  spoke  in  opposition  to  the  proposal  to  extend  to 
ten  years  the  recovery  period  for  certain  assets  used  in  printing  and  publishing.   A  copy  of 
my  full  statement  is  enclosed  with  this  letter. 

For  the  record  I  would  like  to  respond  to  a  question  you  posed  to  me  and  another 
witness  on  the  panel,  Mr.  Howard  C.  Webber,  Chairman,  Cohber  Press,  Rochester,  N.Y., 
representing  Printing  Industries  of  America  and  the  Graphic  Arts  Legislative  Council. 
Specifically,  you  asked  whether  in  general  printers  would  be  more  affected  by  the  proposed 
lengthening  of  the  period  for  depreciating  equipment  used  in  printing  and  publishing,  or  by  a 
proposal  to  require  that  a  portion  of  advertising  expenses  be  capitalized  and  amortized  over  a 
period  of  years  rather  than  treated  as  a  business  deduction  as  under  current  law. 

When  asked  to  assess  the  relative  affects  of  two  detrimental  proposals,  Mr.  Webber 
candidly,  and  I  think  accurately  from  the  point  of  viev/  of  most  printers,  responded  by  saying 
that  the  proposal  to  capitalize  advertising  expense  would  have  a  more  detrimental  affect  on 
printers'  businesses  than  the  lengthening  of  depreciation  from  seven  to  ten  years  on  printing 
equipment.   Although  I  did  not  respond  to  your  question  during  the  hearing,  I  would  like  to 
submit  the  following  comments,  with  the  request  that  they  be  inserted  at  the  appropriate 
place  in  the  hearing  record. 

As  you  wiU  note,  both  my  testimony  and  Mr.  Webber's  is  directed  solely  and 
specifically  to  the  proposal  to  extend  to  ten  years  the  capital  cost  recovery  period  for  assets 
used  in  printing  and  publishing.   As  manufacturers  and  consumers  of  this  equipment,  we  of 
course  have  a  particularly  keen  interest  in  this  narrowly  drawn  proposal  that  directly  targets 
our  businesses.    At  the  same  time,  however,  we  also  have  a  special  concern  about  the 
method  by  which  advertising  expenses  are  treated  for  tax  calculations,  due  to  the  fact  that 
significant  portions  of  many  printers'  incomes  are  derived  from  the  printing  of  advertising. 
While  in  aggregate  terms  the  proposed  change  in  the  treatment  of  advertising  expenses  would 
by  comparison  to  lengthening  depreciation  have  a  significantly  greater  impact  on  the 
economy  as  a  whole,  and  most  printers  in  particular,  neither  proposal  is  desirable  by  itself, 
and  if  combined  would  be  terribly  detrimental  to  the  economic  interests  of  printers  and  their 
suppliers. 

To  carry  the  analysis  further,  while  each  of  the  two  proposals  would  have  a  negative 
impact  on  printers  and  their  suppliers,  this  impact  would  affect  their  businesses  in  different 
ways.   For  example,  requiring  advertising  expenses  to  be  capitalized  and  amortized  would 
undoubtedly  have  a  chilling  effect  on  the  total  market  for  advertising,  as  the  cost  of  such 
activity  becomes  greater.   In  other  words,  the  economic  pie  of  advertising  revenue  would  be 
diminished  as  the  activity  becomes  relatively  more  expensive.   The  statements  of  many  other 
witnesses  in  opposition  to  this  proposal  is  testament  to  the  wide  spread  negative  effect  of 
such  a  proposal. 


1226 


On  the  other  hand,  the  lengthening  of  depreciation  has  more  to  do  with  printing  and 
publishing's  ability  to  compete  for  a  slice  of  the  advertising  revenue  pie.  In  a  market  that  is 
already  challenging  printers  to  stretch  to  remain  technologically  competitive,  the  additional 
competitive  disadvantage  of  lengthening  depreciation  would  make  it  even  more  difficult  for 
printing  and  publishing  to  compete  for  a  share  of  the  market  for  information  dissemination 
vis-a-vis  other  modes  of  communication. 

To  complete  my  response  to  your  question,  let  me  carry  the  analysis  one  final  step. 
Any  reduction  in  the  printing  and  publishing  industry's  ability  to  upgrade  its  technology  will 
have  a  negative  effect  on  the  printing  and  publishing  equipment  supply  industry,  regardless 
of  the  cause  of  that  reduction.    And  to  the  extent  that  these  suppliers'  businesses  decline,  the 
very  existence  of  those  at  the  margin  may  be  jeopardized  while  many  others  are  weakened, 
resulting  in  the  loss  of  good  paying  manufacturing  jobs. 

Moreover,  another  indirect  consequence  of  such  a  decline  which  may  not  immediately 
come  to  mind,  but  to  which  you  alluded  in  your  comments  during  the  hearing,  is  the  fact  that 
exports  of  printing  and  publishing  equipment  have  been  up  during  the  domestic  economic 
slowdown  we  have  been  enduring.   As  you  noted  at  the  time  of  the  hearing,  King  Press 
Corporation,  located  in  your  congressional  district  in  Missouri,  is  an  excellent  example  of  a 
capital  goods  manufacturer  that  has  excelled  in  exporting  to  the  extent  of  being  named 
Missouri  Exporter  of  the  Year.  For  example,  in  recent  times  over  65  percent  of  its  product 
has  been  exported.   Capital  goods  manufacturers  will  not  be  able  to  seize  such  opportunities 
unless  they  are  economically  viable  and  ready  to  compete  for  this  business.   Policies  that 
foster  such  commercial  readiness  are  in  the  economic  best  interest  of  the  country  and  should 
be  encouraged,  not  impeded  by  government  policy,  especially  policy  such  as  the  current 
proposal  to  extend  depreciation  for  assets  used  in  printing  and  publishing,  that  singles  out 
specific  industry  to  its  detriment. 

On  behalf  of  NPES  and  myself,  I  appreciated  the  opportunity  to  testify  before  you  and 
the  other  members  of  the  Subcommittee,  and  hope  that  this  letter  serves  to  further  explain 
our  opposition  to  the  lengthening  of  depreciation  on  assets  used  in  printing  and  publishing,  as 
well  as  the  proposal  to  capitalize  advertising  expenses. 

I  would  be  pleased  to  respond  fiirther  on  these  issues  if  necessary. 


Mark  J.  Nuzzaco 

Director  of  Government  Affairs 


Enclosure 


Subcommittee  on  Select  Revenue  Measures 
Committee  on  Ways  and  Means 
U.S.  House  of  Representatives 

Ben  Cooper 

Regis  J.  Delmontagne 

James  C.  Gould 

A.J.  HaU 

J.M.  Mike  Murray 

John  M.  Naimes 

Howard  C.  Webber,  Jr. 


1227 

Mr.  Cohen  and  Mr.  Feeney,  how  many  jobs  wall  be  affected  by 
this  change  in  the  advertising  deduction  in  your  judgment?  I  real- 
ize we  are  not  going  to  get  any  real  actuarial  or  GAO  accounting 
or  0MB  studies  or  anything  like  that. 

Mr.  Cohen.  Well,  it  is  very  difficult  to  judge.  The  costs  will  go 
up,  the  cost  of  advertising  will  go  up.  Therefore,  budgets  will  go 
down.  So  there  will  be  less  advertising,  there  will  be  less  printing, 
there  will  be  less  newspaper  ads  and  so  forth,  and  it  should — I 
mean,  if  logic  follows,  it  should  reduce  sales  because  people  adver- 
tise to  sell  things,  and  if  you  have  less  information,  there  will  be 
less  purchasers  right  there. 

So  it  is  going  to  have  a  dramatic  effect,  but  it  is  way  down  the 
pike.  It  takes  a  long  time  for  that  to  feed  through  the  system,  but 
it  is  deleterious  to  the  system  obviously. 

Mr.  Hancock.  This  idea  of  getting  rid  of  deductions  started  way 
back  many  years  ago  when  all  of  a  sudden  the  Government  de- 
cided, well,  it  can't  raise  rates  past  50  percent,  so  therefore  it  is 
going  to  start  getting  rid  of  deductions.  Well,  you  can't  fiilly  deduct 
the  cost  of  meals  and  entertainment  expenses. 

I  happen  to  be  a  small  businessman.  I  know  the  benefit  of  taking 
somebody  out  to  lunch  once  in  a  while.  In  fact,  I  probably  have 
closed  more  contracts  at  luncheon  meetings  than  any  other  time. 
So  they  cut  back  on  that  deduction. 

Now  they  are  going  to  reduce  it  to  50  percent.  Now  they  are  talk- 
ing about  cutting  back  the  advertising  deduction.  Here  again,  the 
business  lunch  is  a  little  bit  of  an  advertising. 

Now  my  question  is,  and  here  again  in  generalities,  are  we  head- 
ing toward  a  gross  receipts  tax  rather  than  an  income  tax?  You 
know,  just  taxing  gross  sales?  Is  that  where  we  are  going? 

Mr.  Feeney.  Hopefully  not. 

Mr.  Hancock.  Wouldn't  it  appear  that  this  is  the  route  we  are 
taking?  You  take  advertising.  You  say,  OK,  you  can't  deduct  20 
percent.  Now  3  years  from  now  we  will  say,  well,  you  can't  deduct 
50  percent.  If  we  keep  doing  this,  there  isn't  going  to  be  anybody 
left  to  tax. 

Mr.  Cohen.  The  problem  is  really  more  the  complications  in  ac- 
counting. That  is  as  you  add  one  more  job  for  the  internal  account- 
ant in  the  company  to  take  on,  and  his  external  accountant,  the 
CPA  to  take  on,  you  add  the  costs  there  and  of  course  you  add — 
when  these  proposals  are  suggested,  nobody  thinks  about  the  fact 
it  is  one  more  job  for  the  revenue  agent  to  do.  That  is,  the  revenue 
agent  now  takes  a  look  to  see  whether  the  advertising  costs  or 
other  costs  are  legitimate,  but  once  he  has  done  that,  that  is  the 
end  of  it.  But  there  would  be  a  new  purpose  now,  he  would  have 
to  list  those  which  are  going  to  be  subject  to  this  amortization, 
whatever  that  definition  might  be,  and  that  is  a  problem,  and  then 
he  has  to  subject  them  to  the  amortization  schedule,  and  then  he 
has  to  go  back  and  audit  last  year's  amortization  schedule  to  see 
that  you  are  carrying  forward  the  right  numbers,  so  you  have  add 
infinitely  more  complexity  out  of  this  one  little  change. 

Every  time  you  do  it,  as  you  indicated,  Mr.  Hancock,  every  time 
you  do  it,  you  add  that  much  more  complexity  on  top  of  an  already 
existing  complex  system. 


1228 

Mr,  Hancock.  I  am  having  trouble  finding  out  or  determining 
just  what  is  advertising.  Has  anybody  really  defined  it?  Are  we 
talking  about  radio  and  television?  We  talk  about  newspapers,  we 
talk  about  magazines.  Are  we  talking  about  Yellow  Pages  advertis- 
ing? Are  we  talking  about  handout  pieces?  Are  we  talking  about  a 
PR  employee,  a  guy  who  goes  out  to  solicit  business,  not  a  sales- 
man? Is  that  advertising?  What  is  advertising? 

Mr.  Cohen.  Your  committee  is  going  to  have  to  define  that.  If 
you  were  to  adopt  this  rule,  which  all  of  us  have  opposed,  if  you 
were  to  adopt  it,  you  will  have  to  adopt  a  definition  of  whether  the 
promotional  man  who  goes  out  and  calls  on  people,  is  he  advertis- 
ing? You  know,  are  the  people  who  prepare  materials  within  the 
company  to  supply  information  to  the  advertising  agency,  each  of 
those  would  require  definition.  And  whoever  is  going  to  draft  this, 
you  or  your  staff,  are  going  to  have  to  think  those  problems 
through,  because  otherwise  you  are  going  to  leave  it  to  a  regulation 
writer.  I  used  to  be  a  regulation  writer  once  in  the  Revenue  Service 
and  I  also  used  to  be  a  regulation  signer  once  in  the  Revenue  Serv- 
ice. Otherwise,  you  are  going  to  leave  those  problems  to  those  peo- 
ple and  they  don't  want  to  do  that  either.  They  would  rather  you 
define  them. 

Mr.  Hancock.  What  about  amortizing  election  campaign  adver- 
tising. That  makes  good  sense,  doesn't  it? 

Mr.  Cohen.  We  disallowed  that  many  years  ago,  sir. 

Mr.  Hancock.  Maybe  we  ought  to  look  into  that,  Mr.  Chairman, 
as  part  of  campaign  reform.  You  have  got  to  declare  your  contribu- 
tions as  income  and  then  amortize  the  advertising.  I  don't  know 
who  came  up  with  this,  but  I  know  this,  that  they  are  completely 
illogical.  It  absolutely  does  not  make  sense  to  do  this  to  a  business. 
As  a  small  businessman,  and  I  don't  spend  money  on  advertising 
just  for  the  fun  of  it  or  just  to  see  my  name,  because  my  company's 
name  is  not  my  name.  That  is  not  the  reason  we  advertise.  We  ad- 
vertise to  generate  profit,  therefore  to  expand,  therefore  to  employ 
more  people.  And  advertising  to  me  is  the  lifeblood  of  a  lot  of  small 
businesses,  especially  the  business  that  has  a  new  idea,  something 
that  the  public  wnl  buy  if  in  fact  they  hear  about  it.  Then  we  tell 
them  that  they  have  to  amortize  advertising  or  that  it  is  not  a  de- 
ductible business  expense.  Even  the  legal  profession  is  starting  to 
advertise  now.  They  are  finding  out  that  it  is  a  benefit  to  them. 

Anyway,  Mr.  Chairman,  I  strongly  recommend  that  this  commit- 
tee do  whatever  we  have  got  to  do  to  let  the  business  community 
advertise  their  products.  If  we  don't  advertise  American  products, 
I  will  bet  that  the  Japanese  and  the  Germans  and  others  are  going 
to  advertise  their  products,  and  then  what  happens?  There  is  noth- 
ing we  can  do  about  that. 

Thank  you,  Mr.  Chairman. 

Mr.  Payne.  Mr.  Hoagland  will  inquire. 

Mr.  Hoagland.  I  have  no  questions. 

Mr.  Payne.  Mr.  Camp. 

Mr.  Camp.  No  questions. 

Mr.  Payne.  I  had  just  a  question  for  Mr.  Webber.  Could  you  give 
us  a  description  of  the  kinds  of  equipment  that  are  being  consid- 
ered in  this  proposed  legislation  and  the  cost  of  that  equipment? 


1229 

Mr.  Webber.  Yes,  Mr.  Chairman.  On  the  prepress  area,  you  are 
probably  talking  scanners  and  equipment  that  you  can  start  buying 
for  $4,000,  could  probably  go  up  to  $150,000,  $200,000.  In  the  press 
area,  you  are  talking  probably  small  presses  starting  at  $6,000, 
$7,000,  $8,000,  going  up  to  your  larger  sheet-fed  presses  at  $1.8 
million,  then  into  your  web  presses  probably,  what,  $4  million  or 
on  up. 

In  the  bindery  area,  again  you  can  start  with  small  folders  at 
$5,000,  $6,000,  and  go  up  to  stitcher  trimmers  at  $200,000, 
$250,000,  all  the  way  up  to  $1  million.  For  example,  a  company 
like  ourselves,  a  $10  million  company,  our  presses  cost  anywhere 
in  the  realm  of  $40,000  up  to  $1.8  million.  And  we  sit  right  now, 
and  I  don't  want  to  elaborate,  but  with  a  bank  that  based  upon  a 
5-year  pay  back  to  the  bank,  and  I  don't  know  what  we  would  do 
if  we  went  to  10  years.  They  won't  even  let  us  go  to  7  years. 

Mr.  Payne.  How  long  do  these  assets  typically  last  in  the  print- 
ing industry? 

Mr.  Webber.  I  think  back  in  the  1970s  and  1980s,  they  used  to 
last  probably  10  years,  and  it  was  probably  an  active  thing.  Right 
now,  some  of  our  prepress  equipment  we  are  buying,  we  are  look- 
ing at  an  18-month  to  3-year  payback  because  by  then  it  is  going 
to  be  obsolete,  and  in  the  printing  press  area  we  are  probably  look- 
ing at  5  to  6  years  we  hope  to  replace  our  equipment,  again  be- 
cause of  obsolescence,  not  because  it  wears  out,  but  because  some- 
thing new  and  better  comes  on  the  market. 

Mr.  Payne.  With  your  scanner  equipment? 

Mr.  Webber.  Scanner  equipment.  For  example,  now  the  big  scan- 
ners that  were  bought  for  $200-,  $250,000,  are  being  replaced  by 
desk  top  scanners  costing  $45,000  that  are  no  bigger  than  that.  So 
probably,  I  would  say  scanners  probably  3  to  5  years  max. 

Mr.  Payne.  Thank  you  very  much. 

I  would  like  to  thank  this  panel  for  their  testimony  and  for  put- 
ting this  information  into  the  record.  It  will  be  very  useful  for  the 
subcommittee  and  for  the  full  committee. 

Mr.  Payne.  Our  next  panel  will  testify  concerning  the  increased 
tariff  on  imported  crude  oil  and  the  increased  tariff  on  refined  pe- 
troleum products,  and  we  will  also  have  a  witness  testifying  re- 
garding a  severance  tax  on  hard  rock  mineral. 

The  first  witness  represents  the  Independent  Refiners  Coalition, 
Robert  H.  Campbell,  president  and  chief  executive  officer  and 
chairman  of  the  Sun  Co.,  Inc.,  Philadelphia,  Pa. 

Mr.  Campbell,  if  you  would  proceed  under  the  5-minute  rule. 
Thank  you. 

STATEMENT  OF  ROBERT  H.  CAMPBELL,  PRESIDENT,  CHIEF 
EXECUTIVE  OFFICER  AND  CHAIRMAN,  SUN  CO.,  INC.,  ON  BE- 
HALF  OF  THE  INDEPENDENT  REFINERS  COALITION 

Mr.  Campbell.  Thank  you,  Mr.  Chairman  and  members  of  the 
committee.  As  you  indicated,  my  name  is  Robert  Campbell,  and  I 
am  chairman,  president,  and  chief  executive  officer  of  the  Sun  Co., 
which  as  you  probably  know  is  a  107-year-old  oil  company  that  is 
headquartered  in  Philadelphia.  Philadelphia  also  happens  to  be  the 
home  of  the  first-place  Philadelphia  Phillies,  and  the  expected  site, 
beginning  4  weeks  from  today,  of  the  National  League  baseball 


1230 

playoffs  which  will  determine  who  gets  to  compete  in  this  year's 
World  Series. 

I  am  here  today  to  address  a  world  series  of  another  kind.  This 
is  a  series  involving  our  Nation's  gasoline  production  industry, 
thousands  of  American  jobs,  our  commitment  to  the  environment, 
and  our  national  security. 

You  know,  when  the  Phillies  take  the  field  on  October  7  they  will 
do  so  knowing  that  their  opponents  will  face  the  same  rules  that 
they  do:  The  bases  are  going  to  be  90  feet  apart  for  both  teams  and 
the  pitcher's  mound  is  going  to  be  60  feet,  6  inches  from  home 
plate,  again  for  both  teams.  They  are  going  to  go  into  that  game 
confident  that  ability  will  determme  the  outcome.  Today,  I  am  here 
seeking  that  same  kind  of  competitive  fairness  for  this  country's 
independent  refiners. 

My  written  testimony  that  accompanies  these  remarks  spells  out 
the  background  information  that  I  think  you  will  find  useful.  It  will 
tell  you  that  the  Sun  Co.  is  a  member  of  the  Independent  Refiners 
Coalition,  and  those  are  U.S.  oil  companies  that  have  little  or  no 
crude  oil  production.  We  simply  purchase  crude  oil,  refine  it  into 
products,  and  supply  the  U.S.  economy. 

The  written  testimony  will  also  tell  you  that  70  independent  re- 
fining companies  operate  140  refineries  in  34  States.  We  employ 
200,000  people,  and  they  produce  nearly  40  percent  of  the  gasoline 
purchased  in  the  United  States  today. 

It  will  tell  you  that  independent  refiners  have  made  and  are  con- 
tinuing to  make  enormous  expenditures  to  fulfill  their  environ- 
mental obligations.  Those  expenditures  fall  into  two  categories.  The 
first  is  the  investment  in  new  processing  equipment  to  produce  the 
new,  cleaner  burning  fuels.  The  second  is  the  investment  in  our  re- 
fineries, pipelines  and  terminals  to  eliminate  air,  water,  and  soil 
contaminants. 

The  written  testimony  will  tell  you  that  foreign  manufacturers 
enjoy  a  significant  advantage  in  the  U.S.  marketplace  because  they 
are  not  required  to  meet  the  same  standards  that  we  do,  nor  incur 
the  investment  that  goes  along  with  such  conformance.  The  net  ef- 
fect of  this  is  that  we  are  systematically  shutting  down  refining  ca- 
pacity in  the  United  States  and  exporting  the  jobs  overseas.  This 
makes  absolutely  no  sense,  regardless  of  whether  you  are  a  busi- 
ness executive  like  myself  concerned  about  the  future  of  your  com- 
pany, a  union  leader  concerned  with  job  security  or  an  environ- 
mentalist who  realizes  that  closing  tne  plant  domestically  only 
transfers  the  pollution  overseas  which  still  fouls  the  worlds 
ecosystems. 

Incidentally,  I  might  mention  that  we  have  the  full  support  of 
the  president  of  our  major  union,  the  Oil,  Chemical  &  Atomic 
Workers  International  Union,  in  this  proposal  today. 

I  will  also  tell  you  that  shutting  down  our  refining  industry  in- 
creases our  dependence  on  a  few  foreign  product  manufacturers, 
and  that  creates  a  national  security  issue  of  the  first  magnitude. 

Our  written  testimony  on  behalf  of  the  Independent  Refiners  Co- 
alition will  clearly  urge  you,  as  I  do  now,  to  enact  an  environ- 
mental equalization  fee  on  imported  gasoline  and  blending  compo- 
nents. In  doing  this,  you  will  restore  some  sense  of  reason  to  the 
rule  book  and  curtail  the  further  erosion  of  an  industry  that  has 


1231 

seen  over  154  refineries  shut  down  in  the  United  States  in  the  past 
13  years. 

I  didn't  come  here  today  to  complain  about  the  bilHons  our  indus- 
try has  to  invest  to  comply  with  the  Clean  Air  Act  and  other  stand- 
ards. This  industry  has  heard  the  environmental  message.  We  have 
made,  are  making,  and  will  continue  to  make  the  necessary  invest- 
ments. 

The  company  I  work  for,  for  example,  is  the  first  and  onlv  For- 
tune 500  firm  to  endorse  the  CERES  environmental  principles.  In 
so  doing,  we  have  made  a  "no  doubt  about  it"  commitment  to  the 
environmental  improvement  and  increased  public  accountability.  I 
believe  our  environmental  conscience  and  credentials  are  in  order, 
and  I  know  that  the  air,  water,  and  soil  quality  in  this  country  are 
improving,  and  that  is  something  that  we  can  all  be  proud  of. 

What  we  seek  here  today  is  to  correct  the  consequences  of  a  one- 
sided contest  where  we  make  a  major  investment  in  the  environ- 
ment while  competing  with  foreign  manufacturers  who  get  a  free 
ride  in  our  markets.  Their  environmental  laws  are  5  to  20  years 
behind  ours,  and  it  gives  them  anywhere  from  a  5  to  10  cents  per 
gallon  advantage  as  a  head  start  in  the  U.S.  marketplace. 

You  should  make  no  mistake  about  it:  The  U.S.  refining  industry 
is  a  world-class  industry.  We  have  made  the  necessary  investments 
over  the  years  to  upgrade  our  plants  and  improve  our  productivity 
so  that  we  are  second  to  none  in  our  business.  However,  the  new 
environmental  regulations  have  changed  all  of  that.  It  just  makes 
no  sense  to  now  squander  our  hard-won  leadership  position. 

What  we  have  won  in  the  international  competitive  marketplace 
must  not  be  lost  by  legislative  inaction.  Without  an  environmental 
equalization  import  fee  on  gasoline,  additional  refineries  will  close 
and  additional  jobs  will  be  lost. 

Why  reward  foreign  manufacturers  for  their  inattention  to  the 
environment  while  penalizing  U.S.  firms  that  are  investing  billions 
of  dollars  to  improve  air  and  water  quality? 

Gentlemen,  by  the  decisiveness  of  your  actions,  steps  and  the 
speed  with  which  you  take  them,  you  can  send  a  message  of  fair- 
ness to  the  U.S.  refiners  and  a  message  of  reality  to  foreign  manu- 
facturers that  the  fi-ee  lunch  is  over. 

I  thank  you  very  much  for  your  invitation  to  visit  with  you  today. 

[The  prepared  statement  follows:] 


1232 


Testimony  pr?g^nt^d 

on  Beh93,f  Qf  the 

Independent  Refiners  Coalition 

$ept^pi]?gr  g.  199? 


Mr.  Chairman  and  Members  of  the  Committee,  my  name  is 
Robert  H.  Ceunpbell,  President,  CEO  &  Chairman  of  Sun  Company, 
Inc.  I  am  appearing  today  on  behalf  of  the  Independent 
Refiners  Coalition  of  which  my  company  is  a  member.  The 
Independent  Refiners  Coalition  is  composed  of  twelve  domestic 
independent  refining  companies  who  operate  27  refineries  which 
have  15%  of  U.S.  capacity.  The  members  are  Clark  Oil  & 
Refining  Corporation,  Louisiana  Land  &  Exploration,  The 
Coastal  Corporation,  Tosco  Corporation,  Crown  Central 
Petroleum  Corporation,  Valero  Energy  Corporation,  Ashland  Oil 
Incorporated,  United  Refining  Company,  Tesoro,  Kerr-McGee 
Corporation,  Indian  Refining,  and  Sun. 

Independent  refiners  process  more  than  38%  of  the 
gasoline  consumed  in  the  United  States  and  have  been  in 
business  for  more  than  65  years.  In  1992  there  were  more  than 
70  independent  refining  companies  operating  140  refineries  in 
34  states  employing  200,000  people.  Independent  refiners  are 
defined  as  those  who  buy  at  least  70%  of  their  crude  oil 
requirements  on  the  open  market  and  rely  largely  on  their 
refining  and  marketing  operations  to  meet  all  of  their  capital 
requirements  in  contrast  to  integrated  oil  companies  which 
have  revenue  streams  from  oil  and  gas  production.  In 
addition,  they  are  primarily  domestic  in  operations  and  not 
multinational . 

One  of  the  revenue  raising  proposals  being  considered  in 
this  hearing  is  to  increase  the  tariff  on  imported  crude  oil 
and  refined  petroleum  products.  The  Coalition  has  requested 
the  opportunity  to  be  heard  today  to  testify  in  favor  of  a  tax 
on  imported  gasoline  and  blending  components.  The  Coalition's 
support  for  such  a  tax  is  joined  by  other  refiners,  as  well. 
It  is  strongly  felt  by  the  Coalition  and  these  refiners  that 
a  tax  is  needed  on  imported  gasoline  and  blending  stocks  to 
offset  the  differential  in  the  substantial  embedded  costs  of 
environmental  compliance  in  this  country  compared  with 
relatively  minimal  environmental  compliance  costs  faced  by 
foreign  competitors.  This  differential  is  an  unfair  trade 
advantage  affecting  our  competitiveness  and  will  cause  a 
continued  loss  of  U.S.  refining  capacity.  The  result  is  a 
threat  to  the  national  security  of  the  United  States,  zmd  the 
global  environment. 

This  problem  of  a  significant  difference  in  protection  of 
the  environment  between  the  United  States  emd  other  countries 
creating  an  unfair  trade  advantage  has  been  recognized  by  the 
Administration  and  members  of  Congress.  For  example,  when 
the  President  was  czuapaigning  last  year  and  announced  his 
support  for  the  North  American  Free  Trade  Agreement  (NAFTA) , 
he  did  so  on  the  condition  that  the  environment  had  to  be 
protected  on  both  sides  of  the  border  or  it  would  lower 
Mexican  cost  of  production  which  would  be  unfair  to  American 


1233 


workers.^  Vice  President  Al  Gore  vnrote  in  his  book,  Earth  In 
The  Balance,  that  "...weeOc  and  ineffectual  enforcement  of 
pollution  control  measures  should  also  be  included  in  the 
definition  of  unfair  trading  practices."^  U.S.  Trade 
Representative  Mickey  Kantor  has  testified  on  several 
occasions  before  the  Congress  on  NAFTA  pointing  out  that  there 
would  be  a  trade  advantage  in  Mexico's  favor  if  it  failed  to 
enforce  environmental  laws^.  He  also  stated,  "I  think  we'll 
recognize  that  if  a  difference  is  maintained,  that  will 
probeibly  give  a  competitive  advantage  to  a  firm  operating,  say 
in  Mexico,  compared  to  that  same  firm  operating  in  the  United 
States."* 

The  Majority  Leader  of  the  U.S.  House  of  Representatives, 
Congressman  Richard  Gephardt,  has  spoken  of  the  need  of  other 
countries  to  have  environmental  laws  and  enforcement  of  them 
as  a  competitiveness  issue';  as  has  Senator  Max  Baucus, 
Chairman  of  the  Senate  Environment  and  Public  Works 
Committee."  In  addition.  Senator  David  Boren  has  introduced 
legislation  in  the  past  on  the  subject.'  One  scholar  has 
written  that  even  according  to  present  law,  the  lack  of 
environmental  controls  or  the  failure  to  enforce  them  should 
be  considered  a  subsidy  subject  to  a  countervailing  duty.' 
Therefore,  representatives  of  the  Executive  and  Legislative 
branches  of  our  government  have  recognized  that  the  lack  of 
environmental  protection  laws  and  regulations  or  enforcement 
of  them  is  a  competitiveness  problem  for  American  industries. 
This  has  been  recognized  by  environmentalists  as  well.' 


^Governor  Bill  Clinton  speaking  of  the  North  American 
Free  Trade  Agreement  at  a  presidential  campaign  rally  at  North 
Carolina  State  University,  Raleigh,  North  Carolina,  on  October 
4,  1992. 

^Senator  Al  Gore,  Earth  In  The  Balance.  (Houghton  Mifflin 
Co.:   Boston  1992)  p.  343. 

'Testimony  of  U.S.  Trade  Representative  Mickey  Kantor 
before  the  Senate  Finjmce  Committee,  May  20,  1993. 

*Testimony  of  U.S.  Trade  Representative  Mickey  Kantor 
before  the  Senate  Environment  and  Public  Works  Committee  on 
March  16,  1993. 

'bnA  Dailv  Report  for  Executives.  May  12,  1993. 

^Hearing  of  the  Senate  Environment  and  Public  Works 
Committee,  March  15,  1993. 

'international  Pollution  Deterrence  Act  of  1991,  S.984. 

"Thomas  K.  Plofchem,  Jr.,  "Recognizing  and  Countervailing 
Environmental  Subsidies",  The  International  Lawver.  Volume  26, 
Number  3  (Fall  1992),  p.  763. 

"Testimony  of  Robert  F.  Housman,  Center  for  International 
Environmental  Law,  before  the  Subcommittee  of  Foreign  Commerce 
and  Tourism,  Committee  on  Commerce,  Science  and 
Transportation,  U.S.  Senate,  May  18,  1993. 


1234 


The  cost  to  domestic  refining  for  pollution  etbatement  is 
substantial  and  is  higher  than  for  most  industries.^"  Based 
on  older  figures,  it  has  been  calculated  that  petroleum 
refining  could  account  for  a  disproportionate  17%  of  the 
national  environmental  expenditure  in  the  year  2000.^^  The 
domestic  petroleum  refining  industry  will,  according  to  a  very 
recent  study  done  for  the  Secretary  of  Energy,  invest  $37 
billion  from  1991  through  the  year  2000  and  $14  billion  more 
from  2001  to  2010  to  comply  with  government  environmental 
regulations.^  The  sums  spent  this  decade  will  actually 
exceed  the  total  1990  book  value  of  all  domestic  refineries 
(after  depreciation)  which  is  only  $31  billion."  Refineries 
spent  21%  of  their  capital  in  the  1980 's  on  pollution 
zQ^atement,  which  will  increase  to  42%  in  the  1990 's  and  47%  in 
the  first  decade  of  the  next  century.^*  The  significance  of 
this  massive  cost  is  that  the  cash  flow  of  all  of  these 
refineries  from  1991  through  1995  will  be  $25  billion  less 
than  the  required  environmental  expenditures.^'  These  new 
costs  of  environmental  compliance  will  increase  the  cost  of 
gasoline  by  approximately  5C  a  gallon  in  1994  and  will  rise  to 
approximately  13C  a  gallon  by  the  year  2000,*'  on  top  of  the 
historical  pollution  zQjatement  costs  for  1981  -  1991  of  20  a 
gallon." 

The  recent  National  Petroleum  Council  (NPC)  study  is  the 
only  one  of  which  we  are  aware  that  attempts  to  look  at 
foreign  refining  environmental  protection  requirements.  While 
we  think  this  study  in  general  has  been  very  helpful,  a  great 
deal  more  work  needs  to  be  done  in  actually  determining 
specific  information  on  foreign  environmental  protection. 
There  is,  in  our  opinion,  too  much  speculation  as  to  what 
environmental  standards  will  be  applied  when  and  where  as  well 
as  whether  or  not  they  will  be  enforced.  One  review  of  the 
study  has  noted  that  unlike  the  detailed  analysis  of  U.S. 
costs,  the  estimate  of  foreign  costs  "...is  more  arbitrary  and 
assumption-based  and  thus  subject  to  greater  uncertainty."*' 
The  NPC  study  is  aware  of  this  shortcoming  and  has  termed 
foreign   cost   estimates   as   subject   to   "significant 


Office  of  Technology  Assessment,  Congress  of  the  United 
States,  report  "Trade  and  Environment",  1992.  p.  98. 

**American  Petroleum  Institute  report,  "Costs  to  the 
Petroleum  Industry  of  Major  New  and  Future  Federal  Government 
Environmental  Requirements",  October  1991,  p.  21. 

"National  Petroleum  Council,  U.S.  Petroleum  Refining  . 
August  2,  1993  Draft,  p.  1.  I-l. 

"Uiifl. 

"ibid.,  p.  1.  1-2. 

"ibid. .  p.  1.  I-l. 

"ibid. .  raw  data  used  for  conclusions  in  Chapter  1. 

"Oept.  of  Commerce  report  MA-200. 

**Wright  Killen  &  Co.  report,  "A  Broader  Look  at  U.S. 
Refining  Industry  SurvivaJsility  and  International 
Competitiveness,"  June  8,  1993,  p.  2. 


1235 


uncertainty"."  Foreign  environment,  safety  and  health  costs 
present  and  projected  need  to  be  studied  in  much  more  detail 
and,  due  to  the  coi^>etitiveness  problem,  a  study  needs  to  be 
done  as  soon  as  possible. 

Even  with  these  caveats,  the  NPC  study  has  concluded 
that,  "...most  foreign  areas  lag  the  United  States  in  health, 
safety,  and  environmental  regulations  and,  consequently,  have 
lower  embedded  environmental  costs  them  the  United  States."" 
For  example,  the  U.S.  presently  spends  1.7%  of  its  GDP  on 
environmental  programs  while  the  European  Community's  average 
is  only  1.2%  or  a  third  less."  The  report  goes  on  to  note 
that  although  many  countries  have  adopted  some  environmental 
regulations,  it  is  "...far  less  common  for  these  regulations 
to  be  enforced"."  It  is  further  observed  that  oil  producing 
and  lesser  developed  countries  "...view  government  interests 
in  refining  as  vital  to  national  economic  health  -  a  belief 
that  can  supersede  environmental  agendas."^' 

The  NPC  report  concludes  that,  "Overall,  foreign  regions 
today  are  estimated  to  be  where  the  U.S.  was  roughly  5-20 
years  ago  in  terms  of  environmental  regulations."  Thus,  by 
the  best  information  available,  most  competing  refining  areas 
of  the  world  are  amy  where  from  5-20  years  behind  us  and  may 
or  may  not  adopt  similar  environmental  protection  as  required 
of  our  refiners.  If  they  are  adopted,  they  may  not  be 
enforced. 

Even  with  the  best  case  of  a  five  year  lag  time  for 
foreign  refiners  to  "catch  up"  with  U.S.  environmental 
standards  and  enforcement,  the  damage  to  domestic  refiners 
will  have  been  done,  and  in  all  probability,  will  be 
irreversible.  Over  the  critical  next  five  years,  imported 
gasoline  will  be  readily  availeUsle  to  replace  reduced  domestic 
production  which  will  prevent  U.S.  market  prices  from  rising 
to  allow  full  cost  recovery  of  increased  environment,  safety, 
and  health  costs."  Once  a  refinery  closes  for  these 
reasons,  it  will  not  likely  restart." 

The  NPC  report  concludes  that  if  foreic^n  environmental 
protections  do  not  materialize,  the  cost  of  foreign  produced 
gasoline  would  be  less  than  the  United  States.*'  This  would 


'"npc  Draft  report,  Executive  Summary,  p.  37. 

"ibifl..  Executive  Summary,  p.  11. 

*'eop  Group,  Inc. ,  "The  United  States  versus  European 
Community",  August  13,  1993,  p.  3. 

"ibid. .  Appendix  L,  Section  VII-9,  p.  5. 

"ibid.,  p.  14. 

**Ibid. .  Appendix  L,  Section  VII-10,  p.  1. 

**Wright  Killen  &  Co.,  June  8,  1993  report,  p.  3. 

"Ibid. 

"npC  Draft  report.  Executive  Summary,  p.  11. 


1236 


result  In  increased  Imports  of  gasoline  and  reduced  U.S. 
refinery  utilization." 

Today  management  teeuns  at  domestic  refining  headquarters 
aroxind  the  U.S.  face  a  most  difficult  quandary:  Whether  to 
commit  the  capital  investments  necessary  for  pollution 
eibatement  to  continue  operations  ]cnowing  that  lower  cost 
imported  product  will  make  it  unlikely  to  be  profiteible  or  not 
to  invest.   To  no  invest  means  to  close  the  refinery. 

A  very  important  fact  here  that  must  be  acknowledged  is 
that  although  the  NPC  report  concludes  there  is  a  similarity 
in  the  projected  foreign  refinery  investments  for  the  rest  of 
this  decade  to  American  refining  cost  increases,  those  in  the 
United  States  are  largely  attributed  to  the  environmental 
requirements  while  foreign  increases  included  a  more 
significant  capacity  expansion."  Increased  costs  for 
environmental  protection  neither  builds  additional  capacity  to 
produce  gasoline  nor  does  it  improve  efficiency  of  existing 
capacity  and  while  it  is  good  for  the  ecology,  it  is 
nonproductive  in  terms  of  production  of  additional  gasoline  or 
producing  it  cheaper.^"  Rather,  these  costs  add  another 
layer  of  costs  to  products  offered  in  competitive  markets. ^^ 
The  report  concludes  that  recovery  of  these  costs  are  going  to 
be  difficult  unless  dememd  is  increased  by  further  refinery 
capacity  shutdowns." 

Increasing  refinery  shutdowns  is  precisely  what  has  been 
happening  in  the  refining  industry.  In  the  1980' s,  the  number 
of  domestic  refineries  dropped  from  a  high  of  315  to  184.  131 
refineries  closed  for  a  42%  decrease  in  the  number  of 
refineries  and  the  refining  capacity  fell  from  18.62  million 
barrels  per  day  to  15.7  or  by  20%.  During  that  seune  time 
period,  imports  of  foreign  refined  gasoline  more  than  doubled 
from  140,000  barrels  a  day  to  366,000." 

The  shutdown  of  American  refineries  is  continuing. 
Wright  Killen  &  Co.  conducted  a  plant -by-plant  analysis  of  all 
refining  operations  in  the  U.S.  in  1992.  Their  report 
predicted  that  37  additional  U.S.  refineries  with  1.5  million 
barrels  a  day  of  capacity  or  another  10%  of  the  total  capacity 


"Ibid. 

"ibid. .  Executive  Summary,  p.  39. 

^°Ibid. .  p.  1.  II-2. 

"ibid. 

"Ibifl. 

"ibid.,  Executive  Summary,  p.  17;  Office  of  Industrial 
Resource  Administration,  U.S.  Department  of  Commerce,  The 
Effect  of  Crude  Oil  and  Refined  Petroleum  Product  imports  on 
the  National  Security,  zmd  Investigation  conducted  under 
Section  232  of  the  Trade  Expansion  Act  of  1962,  Table  III  -  3 
(Dec.  1,  1988). 

"ibid. .  Table  III-l. 


1237 


is  at  risk  in  closing  in  the  next  3-5  years.'*  They  have 
found  that  in  the  year  since  the  1992  study,  almost  a  third  of 
the  predicted  capacity  closure,  498,000  barrels  per  day,  has 
in  fact  closed.  At  least  one  more  refinery  has  closed  since 
that  June  8,  1993  update  with  a  loss  of  another  50,000  barrels 
per  day  capacity.'  That  report  is  corroborated  by  the  NPC 
study  which  predicts  that  there  is  going  to  be  a  substantial 
restructuring  in  the  coming  years  characterized  by  shutdowns 
of  refining  capacity.'*  Indeed,  the  NPC  study  concluded  that 
shutdowns  accelerated  in  1992  to  the  third  highest  level  in 
history.'*  A  third  recent  analysis  reporting  that  dropping 
refining  capacity  "  —  is  likely  to  continue  due  to  the  cost  of 
complying  with  environmental  regulations,  particularly 
amendments  to  the  Clean  Air  Act,  and  also  due  to  narrow  profit 
margins  for  most  refining  operations."*"  That  USEA  report 
predicts  increased  petroleum  product  imports  as  a  result 
accompanied  by  dropping  U.S.  employment.** 

Therefore,  we  have  seen  a  20%  decline  in  refining 
capacity  already  zmd  we  are  well  on  our  way  to  a  predicted 
additional  10%  for  a  total  of  a  30%  loss  of  domestic  refining 
capacity  in  just  over  a  decade.  While  additional  imports  will 
likely  occur  to  offset  the  reduced  domestic  production,  one 
should  not  focus  on  the  euaount  of  imports  as  the  sole 
determinant  of  the  problem.  Refining  and  marketing  price 
margins  are  just  as  important  if  not  more  so. 

The  way  the  gasoline  marketing  operates  in  the  United 
States  is  that  the  marginal  barrel  of  gasoline  coming  into  a 
market  sets  the  price.  The  price  is  set  at  the  margin.  Those 
last  barrels  of  gasoline  coming  into  the  market  are  imported 
because  we  are  not  producing  all  that  we  consume.  Because 
they  have  less  embedded  costs  for  environmental  protection  of 
at  least  70  a  gallon,  they  can  sell  their  gasoline  in  our 
markets  for  less  than  that  domestically  produced  even  taking 
into  consideration  the  difference  in  transportation  costs  of 
finished  products  and  that  of  crude  oil.  Their  marginal 
barrel  coming  in  sets  the  price  for  all  of  the  domestic 
gasoline.  If  domestic  gasoline  refiners  don't  lower  their 
prices  to  meet  imports,  then  more  imported  gasoline  will  come 
in  further  displacing  domestic  production  which  will  then  have 
no  market  since  it  costs  more  at  the  pump. 

Today  the  margin  of  profit  on  a  gallon  of  domestic 
produced  gasoline  is  a  penny  a  gallon  or  less.   Thus,  the  50 


"Wright  Killen  &  Co.  report,  "Btu  Energy  Tax  Study",  May 
1993,  p.  2. 

'^Wright  Killen  &  Co.  study,  June  8,  1993,  p.  1. 

"Marathon  Oil  Company  refinery  in  Indianapolis,  Indiana, 
The  American  Oil  &  Gas  Reporter.  August  1993,  p.  14. 

'*NPC  Draft  report,  p.  1.  VI-1. 

'"Ibid. 

*'*United  States  Energy  Association,  "U.S.  Energy  '93",  May 
1993,  p.  3. 

**iiLL<a. 


1238 


a  gallon  differential  now  enjoyed  by  imported  gasoline  which 
will  continue  to  increase  is  a  significant  factor  depressing 
costs  at  the  pump.  If  a  domestic  refiner  cannot  get  back  the 
capital  it  is  going  to  have  to  invest  in  the  future  for 
environmental  protection,  it  will  not  make  that  investment  and 
will  shut  down  the  refinery.  This  is  exactly  the  point  made 
in  the  NPC  study  in  comparing  the  total  pollution  costs  of  $37 
billion  over  the  rest  of  this  decade  substantially  exceeding 
the  cash  flow  of  the  refineries. 

Unless  there  is  some  tremendous  increase  in  demand  for 
gasoline,  which  is  not  predicted  by  anyone,  it  is  not  possible 
for  the  rate  of  return  to  justify  these  expenses.  Therefore, 
the  real  problem  is  not  so  much  whether  the  present  levels  of 
imported  gasoline  are  going  to  go  up  or  down,  but  rather  what 
is  the  marginal  rate  of  return  to  the  domestic  refiner.  As 
long  as  it  is  depressed  as  it  currently  is,  more  refineries 
will  shut  down  rather  than  invest  further.  If  the  embedded 
cost  differential  disappeared,  however,  the  margin  would 
increase  and  refineries  should  remain  on  streeun.  The 
environmental  playing  field  needs  to  be  leveled. 

There  are  several  results  to  a  continued  shut  down  of 
domestic  refineries.  The  first  is  the  economic  consequences 
to  the  United  States.  The  additional  10%  reduction  in 
refining  capacity,  according  to  the  conservative  scenario  of 
a  recent  economic  analysis,  would  increase  inflation  .7  of  a 
percent.*^  It  would  also  affect  interest  rates  by  raising  the 
short  and  long  term  rates  by  40  basis  points.  The  report 
calculates  that  the  dollar  would  rise  as  interest  rates  went 
up  which  in  turn  would  inhibit  the  competitiveness  of  U.S. 
produced  goods  in  international  markets.^*  The  decline  in 
refining  capacity  would  also  affect  U.S.  employment  by  a 
decline  of  nearly  200,000  jobs.*'  Lastly,  the  Gross  Domestic 
Product  would  see  a  decline  of  .3  of  a  percent  in  1994  and 
1995.** 

A  second  result  of  this  decline  in  domestic  refining 
capacity  is  the  effect  on  the  national  security  of  the  United 
States.  A  recent  report  noted  that  five  different  Presidents 
-  Eisenhower,  Kennedy,  Nixon,  Ford  and  Carter  -  imposed 
restrictions  on  imports  of  refined  petroleum  products  because 
they  recognized  that  maintaining  domestic  refining  capacity 
was  essential  to  national  security.*'  The  report  analyzes 
military  needs  in  several  scenarios  and  then  compares  those 
needs  to  our  domestic  refining  capacity.  There  is  a  gap  today 
between  what  we  produce  and  consume  of  1.8  million  barrels  a 


*^he  WEFA  Group,  "Macro  Economic  Impact  of  a  Ten  Percent 
Reduction  in  U.S.  Refining  Capacity,"  May  25,  1993,  p.  3. 

*^Ibid. .  p.  5. 

**Ibid.  .  p.  7. 

*'lbid. ,  p.  8. 

*''lbid. 

*'The  National  Defense  Council  Foundation,  "Refineries  in 
Crisis:  The  Threat  to  National  Security,"  July  23,  1993,  p. 
3. 


1239 


day  which  will  grow  in  1995  to  3.25  million  barrels  a  day  and 
by  the  year  2000  to  6.9  million  barrels  a  day.**  With  a 
military  conflict  arising,  the  gap  would  obviously  increase 
due  to  the  needs  of  the  military  and  military  industrial 
complex,  widening  the  gap  to  4.9  million  barrels  a  day  in  1995 
and  a  8.6  in  the  year  2000.*'  "Even  if  draconian 
conservation  and  rationing  measures  were  employed  during  a 
conflict  and  succeeded  in  achieving  a  reduction  in  civilian 
demand  of  as  much  as  20%,  a  severe  shortage  would  still 
develop."'"  Therefore,  the  report  concludes,  "There  can  be 
no  doubt  in  light  of  the  enormous  and  growing  gap  between 
domestic  refining  capacity  and  domestic  demand,  that  the  tests 
set  forth  in  the  Ford  Administration's  standard  for 
determining  the  point  at  which  refined  petroleum  product 
import  levels  could  constitute  a  national  security  threat  has 
been  met."" 

The  economic  impact  and  the  threat  to  our  national 
security  are  both  to  be  avoided  if  at  all  possible.  As  has 
been  concluded  by  the  United  States  Energy  Association,  "The 
decline  in  our  domestic  ...refining  capacity  cannot 
conceiveibly  be  in  our  national  interest."" 

In  our  opinion,  it  is  possible  to  avoid.  Congress  must 
take  action  to  prevent  further  decline  in  our  industry,  damage 
to  our  economy,  zuid  a  worsening  of  the  threat  to  our  national 
security.  We  propose  that  Congress  pass  a  tax  on  imported 
gasoline  approximately  equalling  the  embedded  costs 
differential  of  environmental  costs  starting  at  70  per  gallon 
on  January  1,  1994  and  increasing  IC  per  year  thereafter  until 
it  reaches  130  per  gallon  on  January  1,  2000.  In  our  opinion, 
this  tax  will  eliminate  the  differential  environmental  cost 
subsidy  enjoyed  by  foreign  refiners  that  will  in  turn  cause  an 
increase  in  the  domestic  refiners  margins  which  will  improve 
their  profiteJaility  preventing  further  shut  downs.  This  tax 
offers  several  advantages: 

1.  The  tax  would  eliminate  the  unfair  competitive 
advantage  held  by  foreign  refiners. 

2.  It  would  remove  a  further  increase  in  the  threat  to 
national  security  of  reduced  refining  capacity. 

3.  It  would  encourage  domestic  refiners  to  expend  the 
money  necessary  for  future  environmental  protection 
by  giving  them  an  opportunity  to  recover  their 
costs . 

4.  It  would  eliminate  the  incentive  for  foreign 
refiners  to  resist  imposition  of  environmental 


*'lbid..  p.  9'. 

*"'lbid. 

"ibid. 

'^Ibid. 

'United  States  Energy  Association,  "Energy  '93  Report" 
10. 


1240 


standards  or  their  enforcement  as  they  would  no 
longer  have  a  cost  advantage. 

5.    It  would  provide  additional  needed  revenues  to  the 
U.S.  Treasury." 

Either  Congress  through  legislation  or  the  President 
under  existing  legislation  could  impose  a  tax  on  imported 
gasoline  on  the  grounds  of  national  security.  Section  232  of 
the  Trade  Expansion  Act  of  1962  expressly  authorizes  the 
President  to  adjust  imports  by  quotas  or  import  fees  which 
threaten  to  impair  the  national  security.'*  This  legislation 
is  broad  and  does  not  define  what  constitutes  a  threat  to 
national  security  as  it  is  left  to  the  President's 
judgment."  Six  recent  Presidents  have  already  used  this 
authority  to  regulate  imports  of  petroleum  and  petroleum 
products.  President  Eisenhower  used  a  quota".  President 
Nixon  imposed  license  fees'',  and  President  Ford  increased 
the  import  fees". 

The  Congress  can  also  legislatively  find  a  threat  to 
national  security  and  impose  a  tax  on  imported  gasoline.  The 
fact  that  Congress  granted  to  the  President  powers  under  §  232 
of  the  Trade  Expansion  Act  of  1962  was  not  an  abdication  of 
its  constitutional  responsibilities.  Rather,  it  is  a  grant  of 
concurrent  power  to  the  Executive  Branch  which  gives  the 
President  the  limited  power  to  make  national  security  findings 
under  Congressionally  prescribed  circumstances,  while  Congress 
also  retains  its  power  to  make  a  national  security  finding.'* 

A  tax  on  imported  gasoline  passed  by  the  Congress  is  also 
consistent  with  U.S.  international  obligations.  It  does  not 
violate  the  General  Agreement  of  Tariffs  and  Trade.  Article 
XXI  of  GATT  provides  a  specific  exception  to  a  contracting 
party  imposing  trade  restrictions  for  reasons  of  national 
security.  That  Article  reads  in  part:  "Nothing  in  [GATT] 
shall  be  construed  ...to  prevent  any  contracting  party  from 
taking  any  action  which  it  considers  necessary  for  the 
protection  of  its  essential  security  interests..."  This 
Article  makes  no  requirement  eO^out  the  manner  in  which  a 
contracting  party  determines  when  it  does  have  a  national 
security  interest  sufficient  to  trigger  this  exception.  GATT 
practice  has  been  to  defer  to  the  decision  of  the  contracting 


'National  Defense  Council  Foundation  Report,  p.  11. 
'*19  U.S.C.  S  1862  (C)(1)(A). 

"ln<agpen<?gnt  gaspling  MarK^terg  cpyingjl  v,  Pungan,  492 

F.Supp.614(D.C.D.C.  1980). 

'^Proclamation  No.  3279,  March  10,  1959,  24  Fed.  Reg. 
1,781. 

"Proclamation  No.  4210,  April  18,  1973,  38  Fed.  Reg. 
9,645. 

'•proclamation  No.  4341,  January  23,  1975,  40  Fed.  Reg. 
3,965. 

"consumers  Union  of  U.S..  Inc.  v.  Kissinger.  506  F.2d  136 
(D.C.D.C.  1974). 


1241 


party  when  they  invoke  the  national  security  exception."  It 
should  also  be  noted  that  not  all  countries  that  export 
gasoline  to  the  United  States  are  contracting  parties  to  GATT. 

Such  a  tax  would  also  be  an  important  environmental 
policy.  If  American  businesses  are  expected  to  make 
significant  investments  to  protect  the  environment,  they  must 
be  reasonably  secure  in  believing  they  are  going  to  be  ahle  to 
get  their  money  back  from  the  operation  of  their  business  and 
not  be  rendered  less  competitive.  This  tax  would  show 
American  refiners  that  our  government  is  not  going  to  let  them 
lose  competitiveness  and  that  they  have  a  chance  in  the 
marketplace  to  get  their  investment  returned.  By  the  same 
token,  it  will  be  a  clear  message  to  countries  around  the 
world  that  have  not  implemented  environmental  protections  or 
are  not  enforcing  them,  that  there  will  be  no  profit  or  trade 
advantage  in  their  failing  to  do  so.  The  domestic  and 
international  environment  will  be  improved  as  a  result. 

A  final  result  of  this  tax  is  that  it  will  raise  revenue. 
Even  with  exempting  Canada  with  whom  we  have  a  free  trade 
agreement,  the  tax  beginning  at  7C  on  January  1,  1994  and 
increasing  IC  per  year  until  it  reaches  13C  per  year  on 
January  1,  2000  will  raise  approximately  $1.9  billion  over  the 
next  five  years.'*  Although  it  will  raise  a  substantial  sum 
of  money,  it  will  not  reflect  a  corresponding  increase  at  the 
pump.  One  report  has  estimated  that  the  average  U.S.  gasoline 
pump  prices  would  not  increase  by  more  than  IC  per  gallon  and 
in  some  cases  less  than  1/4C  per  gallon  as  a  result  of  the 
passage  of  this  t«uc." 

Therefore,  Mr.  Chairman  and  members  of  the  Committee  the 
Coalition  urgently  requests  that  you  pass  a  tax  on  imported 
gasoline  and  blending  components  in  a  miscellaneous  revenues 
bill  which  might  result  from  these  hearings  starting  at  7C  per 
gallon  on  Jemuary  1,  1994  and  increasing  by  IC  per  gallon  a 
year  until  it  reaches  13C  per  gallon  on  January  1,  2000  as 
necessary  to  protect  the  national  security  of  the  United 
States,  help  our  domestic  economy,  protect  the  domestic  and 
international  environment,  and  give  relief  to  the  domestic 
refining  industry  from  foreign  unfair  competition. 


^"Handbook  of  GATT  Disputes  Settlement.  Pierre  Pescatore, 
Transitional  Juris  Publications,  1992,  Part  1:  Introduction, 
p.  58;  GATT  Activities  1986,  pp.  58-59;  GATT  Activities  1987, 
pp.  69-70;  John  H.  Jackson  World  Trade  and  the  Law  of  the 
GATT f  1969 )  .  p.  749;  GATT  Activities  in  1982,  p.  72;  GATT 
Activities  1985,  p.  47. 

'^Energy  Information  Administration,  Petroleum  Supply 
Monthly  for  Imports  January  -  December,  1992  of  Finished  Motor 
Gasoline  and  Motor  Gasoline  Blending  Components  Totalled 
121,668,000  barrels;  divided  by  42  gallons  to  the  barrel 
equals  5,110,056,000  gallons  multiplied  times  7«  and  then  an 
additional  cent  for  each  year  through  IIC  in  the  fifth  year 
equal  $2,299,525,200  less  imports  from  Canada  that  year  which 
were  17%  of  the  total;  equal  $1.9  billion. 

^^right  Killen  &  Co.,  "The  Effects  of  National  Security 
Fee  on  U.S.  Gasoline  Prices",  June  14,  1993,  p.  1. 


1242 

Mr.  Payne.  Thank  you,  Mr.  Campbell. 

Our  next  witness,  representing  the  Independent  Petroleum  Asso- 
ciation of  America,  Virginia  Lazenby,  chairman  and  chief  executive 
officer  of  the  Bretagne  Corp.,  Nashville,  Tenn. 

Ms.  Lazenby. 

STATEMENT  OF  VIRGINIA  LAZENBY,  VICE  CHAIR,  CRUDE  OIL 
POLICY  COMMITTEE,  INDEPENDENT  PETROLEUM  ASSOCIA- 
TION OF  AMERICA,  AND  CHAIRMAN  AND  CHIEF  EXECUTIVE 
OFFICER,  BRETAGNE  CORP. 

Ms.  Lazenby.  Good  afternoon.  I  am  here  today  on  behalf  of  the 
Independent  Petroleum  Association  of  America,  its  44  cooperating 
State  and  regional  associations,  and  the  National  Stripper-Well  As- 
sociation where  I  serve  as  president.  These  organizations  whole- 
heartedly support  an  oil  import  fee  as  part  of  a  comprehensive  plan 
to  preserve  domestic  oil  production. 

Yesterday  oil  closed  at  $17.07  a  barrel,  down  66  cents,  the  lowest 
in  3  years.  Most  U.S.  producers  are  receiving  just  $14  to  $15  a  bar- 
rel. Marginal  production,  20  percent  of  our  U.S.  production,  2  mil- 
lion barrels  a  day,  is  operating  at  a  significant  loss — ^yes,  loss,  we 
are  losing  money. 

We  are  being  destroyed  by  cheap  oil,  which  does  not  pay  environ- 
mental costs.  And  our  Government's  response  is  to  finance  more 
cheap  imported  oil,  which  results  in  more  destruction  of  the  inde- 
pendent oil  producers  and  their  employees.  On  a  personal  note,  just 
before  I  came  over  here  today,  I  called  Kentucky  and  I  shut  in  a 
water  flood  a  well  that  has  been  producing  since  the  1950s. 

Mr.  Chairman,  there  has  been  a  rash  of  stories  in  the  press  late- 
ly about  the  U.S.  Government's  financial  assistance  to  encourage 
oil  production.  Let  me  read  from  the  September  3,  New  York  Times 
entitled  "Texaco  Gets  Aid  to  Invest  in  Russia." 

The  article  explains,  'The  oil  company  has  a  project  to  restore 
production  of  150  dormant  wells  in  Western  Siberia.  The  Overseas 
Private  Investment  Corp. — ^yes,  a  Federal  agency — will  provide  $28 
million  of  loan  guarantees  and  insurance  against  political  risk  for 
the  effort.  The  agency  is  prepared  to  provide  up  to  $2.5  billion  in 
new  loans,  loan  guarantees,  equity  and  insurance  in  the  next  year 
to  support  private  investment  in  Russia." 

I  come  here  representing  U.S.  independent  producers  to  ask  your 
assistance  to  develop  U.S.  resources.  It  is  not  just  the  big  multi- 
national oil  companies  operating  in  Russia  that  need  help  from  the 
U.S.  Government.  U.S.  producers  need  capital,  too,  and  rather  than 
the  $2.5  billion,  1-year  program  in  Russia,  we  are  asking  for  a  $1.5 
billion  program  spread  over  5  years. 

Keep  in  mind  we  may  need  this  even  more.  Since  we  are  told  by 
the  Grovernment  that  the  aim  of  producing  Russian  oil  is  to  sell  it 
on  the  world  market,  which  will  keep  oil  prices  low  and  which,  I 
might  add,  will  put  more  U.S.  independents  out  of  business  and  in- 
crease the  trade  deficit  by  something  like  $7  billion  and  put 
100,000  marginal  producers  out  of  business. 

The  experts  say  oil  prices  fell  yesterday  because  demand  is  down 
in  Russia.  Just  wait  until  the  Russian  production  which  our  Gov- 
ernment is  subsidizing  comes  on  line.  How  low  will  the  price  go 
then?  When  do  we  begin  to  think  about  American  jobs? 


1243 

An  oil  import  fee  is  justified  to  create  a  price  difference  that  bet- 
ter enables  U.S.  producers  to  compete,  to  offset  their  higher  operat- 
ing costs  that  result  to  a  large  degree  from  Government-mandated 
costs  principally  for  environmental  protection.  You  can  bet  that  the 
U.S.  subsidies  for  Russian  oil  development  do  not  come  with  the 
same  high-cost  environmental  requirements  that  U.S.  producers 
must  meet. 

Three  months  ago  I  appeared  before  this  subcommittee  to  discuss 
the  increasing  loss  of  marginal  oil  well  production  in  the  United 
States.  I  pointed  out  then  that  U.S.  oil  production  had  hit  its  low- 
est level  since  1960. 

Our  trade  deficit  is  dominated  by  oil  imports;  last  year  it  was 
$45  billion.  For  the  first  time  since  June,  the  United  States  has 
consistently  imported  more  oil  than  we  produce.  Thousands  of  bar- 
rels of  marginal  oil  production  have  been  shut  in  forever.  U.S.  com- 
panies have  gone  out  of  business. 

According  to  Energy  Secretary  Hazel  O'Leary,  "This  is  not  a  po- 
litical issue.  Everyone  agrees  there  is  a  problem.  The  question  is 
how  to  solve  it." 

Even  now,  her  department  is  finalizing  a  domestic  energy  initia- 
tive for  the  President.  As  part  of  that  initiative,  domestic  oil  and 
gas  producers  have  advocated  tax  policy  changes  that  will  stimu- 
late domestic  oil  and  natural  gas  production.  These  are  discussed 
in  detail  in  our  written  statement. 

Today  I  want  to  emphasize  that  these  tax  changes  can  be  funded 
by  a  small  increase  in  the  current  fee  on  imported  oil  and  petro- 
leum products. 

Mr.  Chairman,  it  costs  more  to  produce  oil  here  than  anywhere 
else.  A  big  part  of  these  costs  are  for  environmental  protection  and 
workplace  safety.  We  pay  for  it,  but  U.S.  oil  production  is  safer  and 
more  environmentally  sensitive  than  anywhere  in  the  world. 

In  all  the  world,  the  U.S.'s  463,000  U.S.  marginal  wells  are  the 
most  economically  vulnerable,  the  most  likely  to  oe  shut  in  if  world 
oil  prices  stay  at  their  currently  depressed  prices  or  fall  even  lower, 
a  very  real  prospect. 

If  the  United  States  adopts  an  energy  policy  that  says  simply 
"Back  oil  out  of  the  market  and  substitute  other  fuels"  like  domes- 
tically produced  natural  gas,  without  some  measure  to  preserve 
those  marginal  wells — it  will  be  oil  from  U.S.  stripper  wells  that 
will  be  backed  out  of  the  market,  not  imported  oil.  It  will  be  pro- 
ducers in  New  York,  Kansas,  Michigan,  Oklahoma  and  a  dozen 
other  States  that  will  be  forced  out  of  business,  not  the  sheiks  and 
princes  of  OPEC  countries. 

A  slight  import  fee  to  pay  for  a  production  credit  with  a  floor 
price,  which  I  understand  the  Clinton  administration  is  considering 
as  part  of  its  domestic  initiative,  will  give  our  country  a  much  bet- 
ter energy  policy,  a  policy  that  preserves  domestic  production  and 
creates  a  level  of  price  stability  that  will  encourage  investment. 

Thank  you,  Chairman  Payne.  That  concludes  my  testimony. 

[The  prepared  statement  and  attachment  follow:] 


1244 


Independent  Petroleum      {^UilJ  s       Association  of  America 


Statement  by 

Virginia  Lazenby 

on  behalf  of  the 

Independent  Petroleum  Association  of  America 

before  the 

Committee  on  Ways  and  Means 

Subcommittee  on  Select  Revenue  Measures 


United  States  House  of  Representatives 

September  8,  1993 


MR.  CHAIRMAN  AND  MEMBERS  OF  THE  COMMITTEE: 

I  am  Virginia  Lazenby.   I  am  from  Memphis,  Tennessee  and  Chairman  of 
Bretagne  Corporation,  an  oil  production  company  with  marginal  wells  operating 
principally  in  Kentucky.   I  appear  today  on  behalf  of  the  Independent  Petroleum 
Association  of  America,  where  I  serve  as  the  Vice  Chair  of  the  Crude  Oil  Policy 
Committee.   I  also  am  the  president  of  the  National  Stripper  Well  Association. 

I  am  pleased  to  provide  views  in  support  of  an  increase  in  fees  on  imported  oil 
and  refined  petroleum  products.   I  also  want  to  address  the  need  for  changes  in  tax 
policy  affecting  domestic  natural  gas  and  oil  production  and  to  restate  our  concerns 
about  other  tax  proposals  that  have  been  introduced  in  the  House  of  Representatives. 

BACKGROUND.   It  has  gone  unnoticed,  but  our  nation  had  an  anniversary  this  year. 
Twenty  years  ago  this  year,  the  Arab  oil  embargo  brought  America's  energy 
vulnerability  into  stark  focus  for  anyone  who  waited  in  a  gasoline  line.   The  1973 
embargo,  and  the  oil  price  rise  that  followed  it  and  the  1979  Iranian  Revolution, 
spawned  initiatives  to  improve  U.S.  energy  security  through  various  programs  focused 
on  conservation,  production  of  synthetic  fuels,  fuel  use  mandates,  and  alternative 
fuels,  but  with  little  to  stimulate  domestic  oil  production.   In  fact,  passage  of  the 
Windfall  Profits  Tax  drained  more  than  $78  billion  dollars  out  of  the  domestic  oil 
industry,  when  it  should  have  been  investing  those  resources  into  new  domestic  natural 
gas  and  oil  reserves. 


Representing  America's  Domestic  Petroleum  Explorer/Producers 
For  information  call  (202)  857-4722 


1245 


What  were  the  results  of  those  everything-but-produce  energy  policy  changes? 
Perhaps,  that  was  best  summed  up  by  the  Office  of  Technology  Assessment  (OTA)  in 
October,  1991,  which  concluded  that  the  United  States  was  more  vulnerable  than  ever 
to  an  oil  import  disruption.' 

The  OTA's  conclusion  was  supported  in  principle  by  an  earlier  Department  of 
Commerce  investigation  into  the  impact  of  oil  import  dependence  on  national  security. 
On  December  1,  1987  a  coalition  of  associations,  companies,  and  individuals 
petitioned^  the  Department  of  Commerce  to  investigate  the  impact  of  crude  oil  and 
petroleum  imports  on  national  security,  asserting  that  imports  had  weakened  the 
domestic  petroleum  industry  to  such  an  extent  it  that  would  not  be  able  to  support 
U.S.  security  needs  in  the  event  of  war. 

After  an  extensive  investigation  and  public  comment,  the  Department  found  that 
"petroleum  imports  threaten  to  impair  the  national  security."   The  Department  of 
Commerce  noted  that  there  had  been  substantial  improvements  in  U.S.  energy  security 
since  its  1979  investigation,  but  pointed  out  that  declining  domestic  oil  production, 
rising  oil  imports,  and  growing  Free  World  dependence  on  potentially  insecure 
sources  of  supply  raised  a  number  of  concerns,  including  vulnerability  to  a  major 
supply  disruption.   Regrettably,  the  report  did  not  result  in  direct  action  by  either  the 
executive  or  legislative  branches  of  the  Federal  government  to  decrease  oil  import 
vulnerability. 

A  substantial  portion  of  Congressional  energy  policy  action  in  the  late  1980s 
and  early  1990s  was  focused  on  repealing  or  greatly  modifying  the  command  and 
control  provisions  of  various  energy  laws,  even  though  the  level  of  the  nation's  oil 
import  dependence  had  begun  to  climb  once  again.   It  appears  that  the  strength  of 
political  will  needed  to  deal  with  our  nation's  dependence  on  imported  oil  had  waned 
with  the  collapse  oil  prices  in  1986.   Outside  of  oil-producing  states,  cheap  oil  was  not 
considered  a  problem.   However,  in  the  oil-producing  states  the  results  of  cheap  oil 
imports  were  devastating,  with  more  than  465,000  jobs  lost  in  less  than  a  decade. 

The  Bush  Administration  launched  its  National  Energy  Strategy  (NES)  in  1989, 
which  resulted  in  the  Energy  Policy  Act  of  1992.   At  the  outset,  the  NES  sought  to 
decrease  the  nation's  oil  import  vulnerability  by  opening  previously  restricted  Federal 
lands  to  oil  exploration  and  production,  providing  additional  incentives  for  the  use 
natural  gas  and  alternative  fuels,  streamlining  nuclear  plant  licensing,  and  encouraging 
greater  conservation  and  energy  efficiency.   Not  surprisingly,  all  elements  of  the 
proposed  NES  became  law,  except  those  proposals  to  open  Federal  lands  for 
exploration  and  development;  indeed,  the  Energy  Policy  Act  of  1992  placed  additional 
restrictions  on  offshore  development  and,  as  a  result  of  a  filibuster,  was  silent  on  the 
opening  of  a  small  portion  of  the  Arctic  National  Wildlife  Refuge  to  development. 


77-130  0 -94 -8 


1246 


The  U.S.  Congress  added  a  tax  title  to  Energy  Policy  Act  of  1992,  that 
substantially  removed  the  'tax  penalty'  on  domestic  drilling  and  production  imposed 
by  the  alternative  minimum  tax  (AMT).   While  these  AMT  changes  brought  the 
effective  tax  rates  of  oil  and  natural  gas  producers  closer  to  the  level  of  those  of  other 
businesses,  it  did  not  provide  new  incentives  for  production  and  drilling.   The  last 
significant  statutory  tax  incentive  for  domestic  exploration  and  production,  the  Non- 
conventional  Fuels  Tax  Credit,  expired  at  the  end  of  1992.   The  "Section  29  credit" 
led  to  the  development  of  extensive  natural  gas  resources  that  probably  would  not  have 
been  developed  at  that  time  without  the  credit. 

DOMESTIC  ENERGY  INITIATIVE. 

In  February  of  this  year.  Energy  Secretary  Hazel  O'Leary  announced  a 
"Domestic  Energy  Initiative"  that  would  seek  to  decrease  the  nation's  oil  import 
dependence,  increase  domestic  oil  and  natural  gas  production,  and  reconcile  energy 
and  environmental  goals.   This  month,  the  Department  of  Energy  is  expected  to 
submit  its  energy  policy  recommendations  to  President  Clinton.    The  IPAA  and 
numerous  other  domestic  energy  groups  have  advocated  an  oil  import  fee  as  part  of  a 
comprehensive  program  to  revitalize  the  domestic  oil  and  natural  gas  industry. 

OIL  IMPORT  FEE.  The  United  States  currently  collects  approximately 
$250,000,000  per  year  through  fees  on  imported  oil  and  refined  petroleum  products, 
as  follows: 

Item  Tariff  Rate 

(per  barren 


Crude  OU 

less  than  2S  gravity 

$0.0525 

more  than  25  gravity 

$0,105 

GasoUne 

$0,525 

Jet  Fuel 

$0,525 

Residual  Fuel  OU 

$0.0525 

No.  2  Fuel  Oil 

$0,105 

IPAA  SUPPORTS  AN  OIL  IMPORT  FEE.   As  the  recent  debate  over  the  BTU  tax 
demonstrated,  any  energy  tax  increase  will  be  controversial  and  raises  issues  ranging 
from  interfiiel  competition  to  disparate  economic  impacts  among  regions  of  the 
country,  and  consumer  costs.   However,  unlike  the  BTU  tax  and  most  other 
alternatives,  only  an  oil  import  fee  gets  to  the  core  issue  of  this  nation's  enerev  policy 
-  the  vulnerability  created  by  the  nation's  excessive  dependence  on  imported  oil  and 
petroleum.   Only  an  oil  import  fee  will  help  the  domestic  industry  survive  its  nearly 
seven-year  long  depression  and,  in  the  process,  create  jobs. 


1247 


EMPLOYMENT.  As  we  have  told  this  Committee  on  several  occasions  in  the  last 
two  yean,  the  U.S.  oil  and  gas  extraction  industry  has  lost  more  than  450,000  jobs 
since  its  peak  employment  in  1982,  more  jobs  than  were  lost  in  the  automobile, 
textile,  steel,  and  electronics  industries.   In  the  first  quarter  of  this  year,  employment 
fell  another  seven  percent  from  the  same  period  last  year.   The  domestic  oil  and 
natural  gas  industry  has  lost  more  jobs  than  it  has  retained  over  the  last  decade. 

RIG  COUNT.  The  rig  count,  the  basic  barometer  of  the  industry's  economic  health, 
fell  in  June,  1992  to  596.  the  lowest  level  ever  recorded  and  the  sixth  all-time  low  set 
in  1992,  which  had  the  lowest  annual  rig  count  ever.'  Rig  count  for  1993,  although 
improved  since  last  year,  is  still  at  less  than  half  the  average  level  over  the  last  twenty 
years. 

TRADE  DEFICIT.   Consumption  of  natural  gas  and  crude  oil  in  the  United  States, 
by  all  official  estimates,  will  continue  to  rise  well  into  the  future.   If  current  trends 
continue,  the  U.S.  could  be  importing  17  million  barrels  of  petroleum  each  day  by  the 
year  2010.   The  climb  in  oil  imports  is  readily  evident.   In  1991,  crude  oil  and 
petroleum  product  imports  accounted  for  more  than  50%  the  nation's  trade  deficit. 
Low  prices  kept  the  value  of  oil  imports  below  that  level  in  1992,  but  oil  imports 
were  46  percent  of  the  trade  deficit  and  remain,  as  in  years  passed,  the  largest  single 
component  of  the  trade  deficit.   This  year,  as  indicated  earlier,  more  than  50  percent 
of  the  crude  oil  and  petroleum  products  consumed  in  America  is  coming  fi-om  foreign 
suppliers. 

NATIONAL  SECURITY.   The  IPAA  was  so  concerned  about  this  trend  that  we 
wrote  President  Clinton  in  January,  and  again  in  June,  urging  him  to  investigate  the 
situation  and  to  take  action  by  imposing  an  oil  import  fee  under  the  authority  granted 
him  under  the  Trade  Expansion  Act.   We  have  not  heard  what  the  Clinton 
Administration  plans  to  do  on  our  request.   We  are  willing  to  examine  the  upcoming 
Domestic  Energy  Initiative  to  see  it  makes  substantial  recommendations  to  improve 
domestic  oil  production.   If  not,  the  IPAA,  other  industry  associations,  and  individual 
companies  may  file  a  petition  under  the  Trade  Expansion  Act.   We  believe  the  issue 
of  oil  import  dependence  must  be  addressed  directly. 

Domestic  natural  gas  and  oil  reserves  are  a  national  security  and  economic 
resource.  Every  barrel  of  oil  and  every  cubic  foot  of  natural  gas  produced  in  the 
United  States  creates  wealth,  jobs,  and  tax  revenues  at  every  level  of  government. 
Unfortunately,  our  nation  is  rapidly  losing  much  of  its  ability  to  domestically  produce 
the  country's  primary  sources  of  energy  ~  oil  and  natural  gas,  which  account  for 
nearly  65  percent  of  the  total  energy  consumption  in  the  United  States. 

THE  NEED  FOR  TAX  POUCY  CHANGES.  EarUer  this  year,  the  IPAA  testified 
before  this  subcommittee  on  H.R.  1024,  the  Energy  Independence,  Infrastructure,  and 


1248 


Investment  Act  of  1993,  that  proposes  tax  policy  changes  to  maintain  and  enhance 
existing  domestic  natural  gas  and  oil  production,  especially  from  economically 
marginal  wells,  and  to  encourage  investment  in  new  drilling.   Without  these  or  similar 
changes  in  tax  policy,  our  nation  will  grow  ever  more  dependent  on  imported  crude 
oil  as  more  domestic  wells  are  plugged  and  abandoned,  their  resources  effectively  lost 
forever. 

The  United  States  has  a  rich  endowment  of  potential  domestic  natural  gas  and 
oil  resources  that,  with  favorable  exploration  and  development  policies,  can 
significantly  reduce  future  oil  imports.   However,  these  resources  will  not  be 
discovered  and  produced  so  long  as  our  country  does  not  aggressively  counter  the 
efforts  of  other  governments  to  capture  the  capital  investment  needed  to  develop 
energy  resources.   The  United  States  cannot  sit  idly  by  while  every  other  nation  with 
energy  resource  potential  provides  inducemenU  to  oil  and  natural  gas  investments. 

Our  government  does  seem  to  understand  the  need  for  economic  inducements 
for  natural  gas  and  oil  development.   The  United  States  is  providing  more  than  $2.5 
billion  in  loans,  loan  guarantees,  and  other  economic  inducements  this  year  for  oil 
development  in  Russia,  through  the  Overseas  Private  Investment  Corporation,  a 
federal  agency.   Independent  producers,  who  account  for  about  60  percent  of  domestic 
natural  gas  production  and  about  40  perxxnt  of  domestic  crude  oil  production,  are 
eager  for  economic  conditions  which  would  allow  us  to  increase  domestic  natural  gas 
and  oil  production.   We  also  urge  Congress  to  create  incentives  for  maintaining  and 
expanding  production  from  the  nation's  marginal  wells. 

MARGINAL  WELLS.  The  United  States  operated  slighUy  more  than  875,000  oil 
and  natural  gas  wells  in  1992,  according  to  World  Oil.   About  two-thirds  of  those 
wells  are  oil  wells,  or  about  595,000  wells.   Nearly  78  percent  of  the  nation's  oil 
wells  are  stripper  wells,  with  an  average  per  well  output  of  about  2.2  barrels  per  day. 

Marginal  wells  -  defined  in  the  tax  code  as  those  wells  that  daily  produce  less 
than  15  barrels  of  oil  and  90  thousand  cubic  feet  of  gas  -  are  essential  to  our  domestic 
energy  supply.   They  provide  approximately  20  percent  of  domestic  oil  production  in 
the  lower  48  states.   These  high-cost  marginal  wells  collectively  produce  more  oil  than 
we  import  from  Saudi  Arabia.   Many  stripper  wells  are  already  uneconomic  to 
operate.   Producers  continue  to  operate  these  wells  in  hopes  of  higher  future  prices, 
but  too  often  are  economically  forced  to  abandon  the  producing  property  before  the 
mineral  deposit  has  been  exhausted.   Stripper  wells,  which  represent  over  15%  of 
domestic  proven  reserves,  have  been  abandoned  at  rate  of  over  17,000  wells  per  year 
for  each  of  the  past  10  years.  Once  these  wells  are  abandoned,  their  production  and 
proved  reserves  are  permanently  lost,  and  our  foreign  energy  dependency  grows. 


1249 


Let  me  point  out,  as  the  attached  map  clearly  shows,  that  the  greatest 
beneficiaries  of  changes  in  tax  policy  affecting  marginal  wells  are  states  not 
traditionally  viewed  as  "oil  producing  states." 

DOMESTIC  DRILLING.  Just  as  we  must  preserve  the  productive  capacity  of 
existing  wells,  the  nation  must  also  encourage  investment  in  drilling  for  new  wells. 
Last  year,  drilling  for  domestic  natural  gas  and  crude  oil  hit  the  lowest  level  since 
records  were  kept  beginning  in  the  1940s,  and  1993  looks  only  slightly  better. 

H.R.  1024  is  intended  to  spur  new  drilling,  as  well  as  improving  the  economic 
life  of  existing  production.   The  n>AA  supports  the  goals  of  this  proposal;  at  the  same 
time  we  have  continued  to  explore  alternative  approaches  to  achieve  the  goals  of  H.R. 
1024.   The  IPAA  Management  Committee  recently  approved  a  production-based  credit 
proposal  for  existing  marginal  wells  and  new  drilling,  based  on  the  approach  used 
under  the  Non-conventional  Fuels  Tax  Credit,  as  follows: 

ELEMENTS  OF  THE  PROPOSAL 

L   NEWLY  DRILLED  WELLS  would  be  eligible  for  a  tax  credit,  based  on 
production,  as  follows: 

a)  Newly  drilled  natural  gas  wells  would  receive  a  $0.50  per  Mcf  tax  credit  for 
the  first  2Q  Mcf  per  day.   Natural  gas  production  in  excess  of  90  Mcf  per  day 
will  receive  a  tax  credit  equal  to  $0.10  for  each  Mcf  of  such  additional 
production  per  day. 

b)  Oil  wells  drilled  in  producing  properties  which  produce  an  annual  per  well 
average  of  25  barrels  of  oil  per  day  or  less  would  receive  a  production  tax 
credit  of  $1 .55  for  each  of  the  first  2  barrels  of  oil  produced  per  well  per  day. 
The  annual  average  production  would  be  determined  after  considering  the 
production  from  the  newly  drilled  well. 

c)  Oil  wells  drilled  in  nonproducing  properties  which  produce  an  annual  per  well 
average  of  25  barrels  of  oil  per  day  or  less,  would  receive  a  production  tax 
credit  of  $1.55  for  each  of  the  first  15  barrels  of  oil  produced  per  well  per  day. 

n.   EXISTING  STRIPPER  WELLS.   Existing  oil  and/or  natural  gas  wells  which  on 
the  date  of  enactment  or  subsequently  qualify  as  a  Stripper  Well  property  would 
receive  a  production  tax  credit  in  the  following  amounts: 

a)  Oil:   $1 .55  for  each  barrel  of  daily  production  up  to  3  barrels  per  day. 

b)  Natural  Gas:  $0,268  per  mcf  of  daily  production  up  to  18  mcf  per  day 


1250 


in.   OTHER  CHARACTERISTICS 

•  Effective  for  production  after  June  1,  1994.  The  rate  of  the  tax  credit  would  be 
phased-in  by  one-third  each  year  between  1994  and  1996,  and  indexed  for 
inflation  thereafter. 

•  Available  to  carry  back  3  years  (but  not  to  a  year  which  precedes  the  enactment 
date)  and  carry  forward  15  years. 

•  Creditable  against  regular  tax  and  alternative  minimum  tax,  but  not  refundable. 

•  Available  to  working  interest  owners  only.  The  credit  would  not  be  allowable 
for  interests  held  by  nonworking  interest  royalty  owners,  or  royalty  interests 
held  by  nonprofit  organizations  such  as  governments,  universities  or  Indian 
tribes,  etc. 

•  Workovers/recompletions  earn  the  new  well  credit  on  incremental  production. 

•  Only  wells  operating  at  their  most  efficient  flow  rate  would  qualify  for  the  tax 
credit.   Otherwise  qualifying  stripper  wells  operating  at  reduced  production 
rates  in  accordance  with  state  regulation  will  not  be  disqualified. 

•  Stripper  wells  which  have  increased  their  efficient  production  through  work- 
over  expenditures  to  levels  in  excess  of  the  stripper  well  rate  will  be  allowed  to 
retain  eligibility  for  the  tax  credit  for  production  up  to  the  stripper  well  limits. 
(Qualification  would  continue  under  provisions  similar  to  the  newly  drilled  well 
limitations.) 

•  Existing  Section  29  wells  not  be  eligible  for  the  marginal  well  production  tax 
credit,  until  the  existing  Section  29  tax  credit  expires. 

•  Properties  producing  both  oil  and  natural  gas,  a  conversion  ratio  of  6  Mcf  per 
barrel  of  oil  would  be  used  to  calculate  equivalent  oil  production,  and  eligibility 
would  be  determined  by  adding  barrels  of  oil  produced  to  the  oil-equivalent  of 
gas  produced  from  each  well. 


NATURAL  GAS  DRILLING.  The  tax  proposal  outlined  above  will  attract  new 
capital  and  new  drilling  activity  to  all  geographic  regions  of  the  domestic  industry.   It 
is  needed.   For  the  first  time  in  several  years,  the  industry  needs  to  increase  natural 
gas  drilling  levels  to  meet  demand.   Government  agencies  and  private  analysts  have 
estimated  that  SOO-600  rigs  need  to  be  drilling  for  natural  gas  to  meet  projected 
consumption.   Only  298  gas  rigs  were  drilling  the  week  of  May  7,  1993. 


1251 


Equally  important,  the  production-based  credit  will  give  a  signal  to  domestic 
producers  that  their  industry's  contributions  are  viewed  as  necessary  to  achieve  the 
administration's  energy  independence  and  economic  recovery  goals.   It  will  also  signal 
that  the  health  of  the  domestic  oil  and  gas  industry  is  important  to  this  administration 
and  that  the  industry  is  not  being  singled  out  for  the  economic  penalties  which  are 
inherent  in  all  energy  taxes. 

REVENUE  OFFSET.   The  revenue  offset  proposed  by  H.R.  1024  to  pay  for 
production  and  drilling  tax  changes  could  be  used  for  the  proposal  outlined  above. 
H.R.  1024  proposes  an  increase  in  fees  on  imported  oil  and  petroleum  products. 
While  this  is  a  preferred  revenue  offset  from  IPAA's  perspective,  the  proposal  for 
increased  in  fees  on  imported  gasoline,  advocated  by  domestic  independent  refiners,  is 
also  acceptable  to  IPAA  if  used  to  provide  tax  policy  changes  for  domestic  production 
and  drilling. 

ADMINISTRATION'S  POSITION.   At  the  June  hearing  on  H.R.  1024,  the  Clinton 
Administration  opposed  making  the  proposed  changes  in  energy  tax  policy  as  outlined 
in  the  legislation.   The  IPAA  subsequently  met  with  Assistant  Secretary  of  the 
Treasury  Leslie  Samuels  and  others  in  the  Department  of  the  Treasury  to  discuss  our 
proposals.   We  have  urged  the  Clinton  Administration  to  recommend  tax  policy 
changes  as  part  of  its  Domestic  Energy  Initiative.    We  understand  that  the 
Administration  is  considering  several  tax  policy  options,  including  an  oil  import  fee 
and  a  floor  price  on  imported  oil. 

H.R.  2026,  Sections  305  and  306.   Finally,  Mr.  Chairman,  I  would  like  to  restate  the 
views  of  the  Independent  Petroleum  Association  of  America  in  opposition  to  two 
provisions  of  H.R.  2026,  Renewable  and  Energy  Efficiency  Incentives  Act  of  1993  - 
Section  305  and  Section  306.   These  two  sections  have  virtually  no  impact  on 
multinational  oil  companies;  their  detrimental  impact,  which  is  severe,  falls  squarely 
on  the  independent  section  of  the  domestic  oil  and  natural  gas  industry  and  most 
particularly  on  marginal  well  producers.    Section  305  would  eliminate  the  long- 
standing and  eminently  logical  distinction  in  tax  law  between  depreciating  assets 
(buildings,  vehicles,  machine  tools,  etc.)  and  depleting  assets  (oil  and  natural  gas 
reserves,  minerab,  etc.)  and  would  undermine  an  important  element  of  the  capital 
structure  which,  quite  frankly,  barely  sustains  the  domestic  independent  oil  and  natural 
gas  industry  today.   Section  306  repeals  the  exception  from  passive  loss  limitation  for 
working  interests  in  oil  and  natural  gas  properties.   This  provision  would  virtually 
eliminate  a  primary  source  of  investment  capital  for  domestic  oil  and  natural  gas 
exploration  and  development  ~  other  oil  and  natural  gas  producers!   Eliminating 
working  interest  investment  capital,  as  proposed  in  Section  306,  would  reduce 
substantially  the  already  anemic  capital  investment  in  drilling. 


1252 


1.  U.S.  Congress,  Office  of  Technology  Assessment,  U.S.   Oil 
Import  Vulnerability:   The  Technical  Replacement  Capability. 
OTA-E-605  (Washington,  DC:  U.S.  Government  Printing  Office, 
October,  1991) . 

2.  Petition  was  filed  under  Section  232  of  the  Trade  Expansion 
Act  of  1962,  as  amended,  (19  U.S.C.  1862). 

3.  The  1992  annual  rig  count  was  721. 


1253 


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Mr.  Payne.  Our  next  witness,  representing  the  Petrochemical 
Energy  Group  and  the  Coalition  on  Energy  Taxes,  is  David 
Damron,  manager  of  government  affairs,  Hoecnst  Celanese  Chemi- 
cal Corp.,  Dallas,  Tex. 

STATEMENT  OF  R.  DAVID  DAMRON,  MANAGER,  GOVERNMENT 
AFFAIRS,  HOECHST  CELANESE  CORP.,  INC.,  ON  BEHALF  OF 
THE  PETROCHEMICAL  ENERGY  GROUP  AND  COALITION  ON 
ENERGY  TAXES 

Mr.  Damron.  Thank  you,  Mr.  Chairman.  I  will  limit  my  verbal 
comments  today  to  three  concluding  statements  and  one  rec- 
ommendation. 

First,  an  oil  import  tax  is  a  poor  way  to  raise  revenues.  The  ulti- 
mate cost  in  jobs,  in  competitiveness,  in  Government  outlays,  far 
exceeds  the  other  benefits. 

Second,  the  failures  of  past  efforts  to  use  a  tax  on  imported  oil, 
that  is  ranging  from  regulation  of  domestic  oil,  windfall  profit 
taxes,  and  a  bureaucracv  allocating  competitive  advantages  and 
trying  to  achieve  regional  equity  in  prices  of  oil,  should  not  be  vis- 
ited again  on  the  American  people. 

Third,  an  oil  import  tax  will  not  address  the  problem  of  access 
to  new  sources  of  domestic  oil  and  will  induce  problems  with  for- 
eign sources,  particularly  if  there  is  selective  and  discriminatory 
application. 

The  recommendation  that  we  have  is  that  the  solution  is  to  re- 
frain from  imposing  any  tax  on  imported  oil  or  refined  petroleum 
products. 

Thank  you. 

Mr.  Payne.  Thank  you. 

[The  prepared  statement  follows:! 


1255 


BEFORE  THE  SUBCOMMITTEE  ON  SELECT  REVENUE  MEASURES 

COMMITTEE  ON  WAYS  AND  MEANS 

UNITED  STATES  HOUSE  OF  REPRESENTATIVES 

TESTIMONY  IN  OPPOSITION  TO  AN  OIL  IMPORT  TAX 

ON  BEHALF  OF 

THE  PETROCHEMICAL  ENERGY  GROUP  AND 

THE  COALITION  ON  ENERGY  TAXES 

September  8,  1993 


Thank  you  Mr.  Chainnan.   My  name  is  R.  David  Damron  and  I  appear 
today  on  behalf  of  the  Petrochemical  Energy  Group  ("PEG")  and  the  Coalition  on 
Energy  Taxes  ("COET')  at  the  hearing  of  September  8,  1993,  as  announced  by  Press 
Release  #9.   We  appreciate  the  opportunity  to  be  heard. 

The  companies  represented  are  independent  chemical  companies.'   That 
is,  we  are  not  vertically  integrated  with  major  oil  companies.    We  are  industrial 
consumers.   We  are  not  major  producers,  refiners,  transporters,  or  marketers  of  oil  or 
refined  petroleum  products.    But  we  are  major  manufacturers  who  must  consume  oil  and 
its  derivatives  in  order  to  make  goods  for  sale  in  the  domestic  and  foreign  markets. 

Petrochemical  manufacturers  have  the  additional  distinction  of  requiring 
oil  and  its  derivatives,  not  only  for  fuel,  but  also  for  raw  materials. 

A.         SUMMARY  STATEMENT:   THERE  SHOULD  BE  NO  FURTHER  TAX 
IMPOSED  ON  OIL  OR  REHNED  PETROLEUM  PRODUCTS 

One  of  the  proposals  under  consideration  at  this  hearing  is: 

"Natural  Resources" 

"2.  A  proposal  to  increase  the  tariff  on  imported  crude  oil 
by  15-cents-per-barrel  and  refined  petroleum  products  by  1- 
cent-per-gallon." 

We  respectfully  urge  that  there  be  no  new  tax  imposed  on  imported  crude 
oil  or  on  imported  refined  petroleum  products.   A  tariff  or  tax  on  imported  oil  and 
product  can  be  expected  to: 

(1)  decrease  domestic  jobs  and  productivity,  thus  lowering  tax  revenues 
and  increasing  social  costs; 

(2)  decrease  competitiveness  of  American-based  companies  in  both  the 
domestic  and  export  markets,  thus  lowering  tax  revenues  and  further  eroding  the  balance 
of  trade; 

(3)  increase  costs  to  all  consumers  of  oil,  just  as  the  BTU  tax  on  oil 
would  have  done,  had  the  Congress  decided  to  enact  one  in  connection  with  the  Budget 
Reconciliation  Act; 

(4)  result  in  the  revival  of  an  elaborate  bureaucracy  to  administer  the 
program  and  to  grant  exemptions,  subsidies,  and  entitlements  to  both  domestic  and 
foreign  oil,  and  to  resolve  claims  for  redistribution  of  taxes  and  costs  among  States  and 
Regions  of  the  country; 

(5)  result  in  a  revival  of  the  Windfall  Profit  Tax  on  domestic  oil; 


^Air  Products  &  Chemicals,  Inc.,  Dow  Chemical  Company,  Eastman  Chemical  Company, 
Goodyear  Tire  &  Rubber  Company,  Hoechst  Celanese  Corporation,  PPG  Industries,  Quantum  Chemical 
Corporation,  and  Union  Carbide  Corporation. 


1256 


(6)  be  ineffective  in  encouraging  exploration  and  production  of  new 
domestic  oil  reserves; 

(7)  be  ineffective  in  stemming  imports;  and 

(8)  be  inconsistent  with  respect  to  taxing  imports,  the  inconsistency 
being  based  upon  country  of  origin. 

The  reasons  for  these  expectations  are  set  forth  below  under  three 
groupings: 

B.  The  Effect  on  Jobs  and  Competitiveness  is  Too  Negative  to  Justify 
an  Oil  Import  Tax  as  a  Deficit  Reduction  Measure. 

C.  An  Oil  Import  Tax  Has  Been  Tried  In  The  Past  and  Was  a 


D.        A  Tax  or  Tariff  on  Foreign  Oil  Will  Not  Serve  To  Displace  Imports. 

In  connection  with  our  testimony,  we  do  not  intend  to  discuss  the  levels  of 
the  proposed  taxes  or  the  differential  between  the  tax  on  crude  oil  and  refined 
petroleum  products.   We  believe  that,  to  do  so,  would  detract  from  the  point:   no 
additional  tax,  at  any  level,  should  be  enacted.  Whatever  the  rate  in  the  initial 
legislation,  the  amount  could  be  changed  upward  at  any  time.  Therefore,  the  amount 
only  affects  the  degree  of  harm. 

B.        THE  EFFECT  ON  JOBS  AND  COMPETITIVENESS  IS  TOO  NEGATIVE 
TO  JUSTIFY  AN  OIL  IMPORT  TAX  AS  A  DEnCIT  REDUCTION 
MEASURE  aXEMS  A(l)  TO  A(3)). 

Such  a  tax  operates  to  drive  the  price  of  both  foreign  and  domestic  oil 
above  the  world  oil  price.   This  directiy  affects  the  abihty  of  domestic  enterprises  to 
compete  with  foreign  sources,  thereby  reducing  domestic  jobs  and  the  ability  of  domestic 
companies  to  compete  in  both  the  American  marketplace  and  the  world  marketplace. 

There  is  already  a  serious  problem  facing  this  country  with  respect  to  the 
balance  of  trade.   The  Washington  Post  of  June  16,  1993,  reported  that  the  United 
States  is  running  an  even  larger  deficit  in  the  trade  of  goods.   "Foreign  demand  for  U.S. 
products  continued  to  erode,  totalling  $112  billion  in  the  first  quarter,  down  from  $114 
billion  the  previous  quarter.   But  U.S.  imports  of  goods  increased  a  fraction,  to  $140 
billion."   A  headline  in  the  August  20,  1993,  issue  of  The  Washington  Post  reads  "U.S. 
Trade  Deficit  Hit  Six- Year  High  in  June;  White  House  Voices  Fear  Over  Yen's 
Strength". 

A  basic  policy  question  to  ask  is  whether  it  is  prudent  to  affect  adversely 
the  ability  of  American  industry  to  produce  goods  and  to  provide  jobs  in  the  country  by 
adding  still  another  tax  in  the  form  of  an  oil  import  fee? 

I  appear  today  as  a  representative  of  one  segment  of  American  industry,  a 
segment  that  can  be  called  "chemical"  companies.   Chemicals  have  been  more  exported 
than  imported  into  this  country.  This  has  been  a  bright  spot  in  the  balance  of  trade, 
contributing  a  positive  $16.3  biUion  in  1992  and  providing  employment  for  some  1.1 
million  employees.   (Bureau  of  Labor  Statistics,  U.S.  Department  of  Labor, 
"Employment  and  Earnings"  (June  1993).) 

Unfortunately,  the  trend  is  not  good,  due  to  global  competition.    In  1991, 
the  positive  balance  of  trade  was  $18.8  billion.   (U.S.  Bureau  of  Census,  U.S. 
Department  of  Commerce,  "U.S.  Merchandise  Trade,  Jan  1991-  Dec  1992  Final 
Report".)   We  need  no  further  handicaps  to  our  competitiveness. 


1257 


Just  to  nail  down  the  point,  the  Department  of  Commerce  has  noted  that 
"small  price  differentials  of  its  commodity  products  can  determine  whether  it  is  better  to 
produce  or  import  primary  petrochemicals."   (International  Trade  Administration,  U.S. 
Department  of  Commerce,  U.S.  Industrial  Outlook  1993.  "Chemicals  and  Allied 
Products"  at  11-3  (1993).) 

The  Congress  recently  decided  to  raise  revenues  through  a  motor  fuels  tax 
and  not  through  a  BTU  tax.    (Omnibus  Budget  Reconciliation  Act,  Pub.L.  No.  103-66.) 
An  oil  import  tax  has  the  same  basic  effect  as  a  BTU  tax  on  oil  -  it  raises  the  cost  of 
petroleum-based  energy  and  feedstocks  to  residential,  commercial,  electric  utility, 
transportation,  and  industrial  consumers.   Hopefully,  the  issue  will  not  be  revisited. 

Since  we  must  withstand  the  allegations,  obviously  true,  of  being  personally 
interested  in  the  outcome,  we  respectfully  suggest  that  we  share  views  with  a  wide  variety 
of  expert  Government  agencies,  and  we  would  like  to  suggest  review  of  several  studies. 

It  is  appropriate  to  review  what  the  Congressional  Budget  Office  ("CBO") 
found  in  its  April,  1986  Study  entitled  "The  Budgetary  and  Economic  Effects  of  Oil 
Taxes."   Two  particular  passages  are  relevant  to  this  discussion.   First,  there  is 
recognition  that  the  tariff  receipts  as  well  as  the  higher  taxes  collected  from  domestic  oil 
producers  as  a  result  of  higher  prices  "would  be  offset  by  reduced  corporate  profits  and 
personal  incomes  elsewhere,  as  higher  energy  prices  raised  business  costs  and  reduced 
the  income  available  for  consumption  of  other  goods  and  services."   (Congressional 
Budget  Office,  "The  Budgetary  and  Economic  Effects  of  OU  Taxes",  at  17  (1986).^) 

Second,  the  CBO  in  the  same  study,  devoted  a  section  to  the  "Effects  on 
U.S.  Trade  and  Competitiveness"  at  39-42,  a  section  recommended  for  study.  Included 
at  39  is  this  statement: 

Whatever  the  net  effects  of  oil  taxes  on  the  balance  of  trade 
and  exchange  rates,  U.S.  comparative  advantage  in 
international  trade  would  be  likely  to  shift  away  from  those 
industries  that  are  relatively  oil  intensive  or  energy  intensive, 
since  their  foreign  competitors  would  not  be  paying  an  added 
tariff  on  their  energy  or  oil  inputs  [footnote  omitted].   This 
would  force  U.S.  firms  to  reduce  their  output  or  else  accept 
smaller  margins. 

The  CBO  identified  industries  which  it  found  to  be  vulnerable.   These 
included  paper,  particularly  in  New  England  and  the  Middle  Atlantic  States,  the 
chemical  industry  ("[t]he  U.S.  chemical  industry  also  has  substantial  exporte  that  could 
be  placed  at  risk  if  their  prices  rose  substantially",  id  at  41),  and  agricultural  exports. 

The  CBO  is  not  alone  in  reaching  these  conclusions.  The  "National 
Energy  Strategy:   Powerful  Ideas  for  America",  noted  that  measures  such  as  an  oil 
import  fee  would  have  an  adverse  affect.   ("National  Energy  Strategy:   Powerful  Ideas 
for  America"  at  5  (February  1991).)   "But  the  cost  would  be  very  high  -  in  higher  prices 
to  American  consumers,  lost  jobs,  and  less  competitive  U.S.  industries."   Id    (Accord 
U.S.  Department  of  Energy,  "Energy  Security:   A  Report  to  the  President  of  the  United 
States"  (March  1987).) 

The  Bureau  of  Economics  Staff  Report  to  the  Federal  Trade  Commission, 
puts  it  this  way:  "The  costs  of  using  a  tariff  on  oil  imports  to  raise  revenue  appear  to  be 
quite  high.  At  a  minimum,  the  figures  suggest  that  serious  consideration  should  be  given 
to  finding  a  less-costly  alternative  before  such  a  policy  is  adopted."   (Keith  B.  Anderson 


'For  the  sake  of  completeness,  the  CBO  Ubles  indicate  a  conchision  that  the  tariff  plus  the  corporate 
income  and  windfall  profit  taxes  collected  from  domestic  oil  consumers  as  a  result  of  the  tariff  would  be 
greater  than  the  loss  of  revenue  in  the  consuming  sector  and  residential  sector,  a  conclusion  noted  to  be 
inconsistent  with  that  of  DRI  in  the  Congressional  Research  Service's  report  entitled  "Oil  Import  Tax; 
Some  General  Economic  Effects",  CRS  Report  for  Congress  No.  87-259  E  (1987). 


1258 


&  Michael  R.  Metzger,  Bureau  of  Economics,  Federal  Trade  Commission,  "A  Critical 
Evaluation  of  Petroleum  Import  Tariffs:  Analytical  and  Historical  Perspectives",  at  52 
(April  1987).)   In  sum,  the  cost  to  consumers  and  the  cost  to  the  economy  are  found  to 
be  greater  than  the  tariff  revenue  raised. 

Please  also  consider  the  March  1987  report  of  the  Congressional  Research 
Service  of  the  Library  of  Congress  entitled  "Oil  Import  Tax:   Some  General  Economic 
Effects"  at  3  stating: 

An  oil  import  tax  would  reduce  the  Federal  Government 
budget  deficit  by  less  than  a  naive  calculation  would  indicate. 
Lx»wer  economic  activity  would  cut  Government  tax  revenues; 
and  higher  prices  would  increase  transfer  payments  with  cost- 
of-living  adjustments  and  Government  ouUays  for  suppUes. 
Higher  prices  would  also  raise  Government  receipts  —  by 
more  than  the  outlays  are  boosted,  but  not  enough  to  offset 
the  effect  of  lower  GNP. 

Further,  "[a]n  oil  import  tax  initially  would  tend  to  worsen  the  competitive 
position  of  certain  U.S.  industries.   Energy  costs  of  domestic  energy-intensive  indus- 
tries ~  such  as  petrochemicals,  paper,  and  primary  metals  -  would  tend  to  increase, 
while  relatively  lower  oil  prices  abroad  would  lower  production  costs  of  competing 
foreign  industries."   Id  at  7. 

Even  avid  proponents  of  an  oil  import  fee  concede  the  impact  on 
competitiveness.  The  Energy  and  Environmental  Policy  Center  at  Harvard  University, 
acknowledges  that  an  oil  import  fee  will  destroy  the  ability  of  domestic  petrochemical 
companies  to  compete  in  both  domestic  and  world  markets.   (William  W.  Hogan  & 
Bijan  Mossanar-Rahmani,  Harvard  International  Energy  Studies.  "Energy  Security 
Revisited",  (published  by  the  Energy  &  Environments  Policy  Center,  Harvard  University 
(1987).)  The  suggestion  is  either  that  we  simply  go  out  of  business  in  favor  of  foreign 
sources  or  that  we  seek  government  subsidies  in  order  to  remain  in  business.   Neither  is 
an  attractive  option  to  us.   We  hope  that  neither  driving  energy  intensive  manufacturers 
out  of  business  nor  subsidizing  them  is  an  attractive  option  to  the  Congress  either, 
particularly  for  those  industries  who  now  manage  to  compete  successfully  in  world 
markets  and  earn  a  favorable  balance  of  trade  for  this  nation. 

Therefore,  we  respectfully  suggest  that  the  costs  of  an  oil  import  tax  are 
too  high,  and  the  tax  on  imported  oil  and  refined  petroleum  products  should  not  be 
adopted. 

C.        AN  OIL  IMPORT  TAX  HAS  BEEN  TRIED  IN  THE  PAST  AND  WAS  A 
DISASTER  (ITEMS  A(4)  AND  (S)). 

The  concept  has  been  tried  in  the  past  and  abandoned.  Oil  import  quotas, 
fees,  tariffs  or  taxes  did  not  work.   The  disruptions  to  the  economy  were  both  real  and 
intense.  The  program,  in  any  form,  should  not  be  revived.   Once  should  be  enough. 

The  oil  import  quota,  fee,  or  tax  was  imposed  in  this  country  in  one  form 
or  another  from  1958  until  1981.    (Exec.  Order  No.  12,287,  3  C.F.R.  124  (1981),  reprinted 
in  46  Fed.  Reg.  9909.  (1981).)     Now,  even  twelve  years  later,  the  complexities  and  the 
litigation  arising  out  of  that  entire  scheme  have  still  not  been  resolved.   (Final  Filing 
Deadline  in  Special  Refund  Proceeding  Involving  Crude  Oil  Overcharge  Refunds,  58 
Fed.  Reg.  26,318-26,319  (1993).) 

In  brief  summary,  from  1958  until  the  early  1970's,  a  "quota"  system  was 
imposed  on  grounds  of  national  security.   This  was  called  the  "Mandatory  Oil  Import 
Program",  or  MOIP.   At  the  time,  the  U.S.  had  the  ability  to  supply  all  the  oil  that  this 
country  needed  as  well  as  to  meet  the  needs  of  foreign  countries  in  times  of  crisis.   The 
basic  thought  was  that  foreign  oil,  being  cheaper  following  World  War  II,  would  displace 
too  much  domestic  production  and,  thus,  had  to  be  limited. 


1259 


The  program  started  out  as  a  system  whereby  imports  of  foreign  oil  and 
foreign  refined  products  were  "licensed"  for  import,  sometimes  called  "tickets".   Since,  at 
the  time,  foreign  oil  was  perceived  to  be  "cheaper"  than  domestic  oil,  the  ability  to 
import  provided  a  profit  opportunity  represented  by  the  difference  between  the  price  of 
a  domestic  barrel  and  the  price  of  a  foreign  barrel.   Companies  who  had  "tickets" 
allocated  to  them  by  the  Federal  Govenmient  thus  gained  a  competitive  advantage  over 
those  who  did  not  get  an  allocation  of  "tickets"  from  the  Federal  Government. 

Needless  to  say,  before  a  decade  was  over,  legislative  and  administrative 
battles  were  fought  for  exemptions  from  the  quotas  for  certain  regions  and  the  "tickets" 
were  distributed  to  refiners  and  petrochemical  companies  in  ways  that  the  Government 
thought  achieved  economic  equity.   (See  Cabinet  Task  Force  on  Oil  Import  Control, 
"The  Oil  Import  Question:   A  Report  on  the  Relationship  of  Oil  Imports  to  the  National 
Security",  (February  1970).) 

The  Petrochemical  Energy  Group  came  into  existence  in  1972  for  the 
purpose  of  seeking  equity  between  independent  petrochemical  companies  and  the 
petrochemical  arms  of  major  refiners,  who  were  allocated  "tickets." 

The  second  phase  started  in  the  early  1970s,  not  uncoincidentally  about  the 
time  that  the  Texas  Railroad  Commission  and  the  other  producing  states  went  to  100% 
allowables,  or  the  equivalent  thereof,  for  their  programs  for  prorationing  the  production 
of  oil.   To  OPEC  or  elements  thereof,  this  was  the  signal  that  the  U.S.  had  not  only  lost 
its  ability  to  send  oil  to  Europe  in  times  of  crisis,  such  as  the  brief  war  over  the  Suez 
Canal,  but  that  the  U.S  was  no  longer  self  sufficient.   It  may  be  better  to  express  this 
point  in  the  exact  words  of  the  Congress  of  the  United  States  in  the  Emergency 
Petroleum  Allocation  Act  of  1973: 

Sec.2(a)  The  Congress  hereby  determines  that  - 

(1)  shortages  of  crude  oil,  residual  fuel  oil,  and  refined 
petroleum  products  caused  by  inadequate  domestic 
production,  environmental  constraints,  and  the  unavailability 
of  imports  sufficient  to  satisfy  domestic  demand,  now  exist  or 
are  imminent. 

The  rest,  as  they  say,  is  history.  The  quota  system  did  not  maintain  and 
protect  domestic  production  capability  so  that  the  U.S.  could  be  self-sufficient  in  oil. 
Imports  became  a  practical  necessity  over  twenty  years  ago. 

At  least  two  major  embargoes  of  exports  to  the  United  States  took  place  in 
the  1970s,  together  with  rapidly  escalating  oil  prices,  led  by  the  prices  from  abroad.  (See 
Daniel  Yergin,  The  Prize:   The  Epic  Ouest  for  Oil,  Money,  and  Power  (1992).) 

A  quota,  of  course,  became  obsolete,  and  the  "fee"  (another  word  for  tax 
or  tariff)  on  imported  oil  was  substituted.    Not  only  did  an  oil  import  fee  come  into 
existence,  but  the  regulatory  bureaucracy  needed  to  manage  the  MOIP  had  to  be 
expanded  in  order  to  take  over  the  allocation  and  pricing  of  domestic  oil  as  well  as  to 
allocate  subsidies  and  the  like.   A  new  feature  was  added:   a  Windfall  Profit  Tax  on 
domestic  oil.   These  two  features  will  be  discussed  immediately  below. 

First,  there  was  the  enlargement  of  an  even  more  elaborate  regulatory 
scheme,  far  eclipsing  that  under  the  quota  system.   This  included  agencies  for  allocating 
and  pricing  both  domestic  and  foreign  oil  and  refined  petroleum  products.   While  the 
degree  of  regulation  varied  over  the  next  decade,  at  its  zenith  the  effort  was  made  by  the 
federal  government  to  equalize  the  cost  of  all  domestic  oil  and  all  imports  as  well  as  to 
provide  subsidies  to  those  enterprises  thought  deserving  of  subsidy.    Rather  than 
"tickets",  these  were  called  "entitlements."   Entitlements  were  exchanged  for  cash.   The 
Department  of  Energy's  current  Secretary  --  the  Honorable  Hazel  O'Leary  ~  was,  in  her 


1260 


prior  Government  service,  in  charge  of  this  elaborate  bureaucracy.'  Such  a  bureaucracy 
lies  dormant  at  the  DOE,  with  ration  books  and  allocation  schedules  ready  to  go,  once 
the  Government  sets  a  differentia]  between  foreign  and  domestic  oil  and  the  scramble  is 
on  to  evade  the  tax,  to  profit  from  the  tax,  or  to  minimize  the  competitive  harm  in  the 
tax.   See  10  C.F.R.  §  211,  App.  A  (1993). 

Second,  there  was  a  Windfall  Profit  Tax.   (Crude  Oil  Windfall  Profit  Tax 
Act  of  1980,  Pub.L.  No.  96-223,  94  Stat  229  (April  2,  1980)(repealed  1988).)   In  essence, 
this  tax  sought  to  divert  to  the  Treasury  some  of  the  price  increases  for  domestic  oil  and 
product  which  were  made  possible  by  the  higher  foreign  prices  plus  the  oil  import  tax, 
acting  as  a  tariff  barrier.   (The  Btu  tax,  included  in  the  House-passed  version  of  the 
Omnibus  Budget  Reconciliation  Bill  of  1993,  had  the  same  basic  effect  as  a  Windfall 
Profit  Tax  in  that  it  was  applicable  both  to  domestic  and  to  foreign  oil.) 

In  net  effect,  the  two  phases  were  remarkably  similar,  as  stated  in  a  Report 
of  the  Department  of  Energy  entitled  "The  Effect  of  Legislative  and  Regulatory  Actions 
on  Competition  in  Petroleum  Markets."  The  following  statement  sums  it  up: 

Domestic  oil  prices,  now  regulated  by  formal  price  controls, 
were  previously  regulated  (in  effect)  through  state  pro- 
rationing  laws  and  oil  impori  quotas.  The  cost  equalizations 
among  refiners  made  possible  by  the  Entitlements  Program 
exhibited  similar  tendencies  under  the  quota  tickets  of  the 
Mandatory  Oil  Import  Program.  The  same  groups  which 
received  special  benefits  under  pre-Embargo  regulations  now 
receive  those  benefits  under  new  regulations;  small  refiners, 
importers  of  residual  fuel  oil  into  the  East  Coast,  and  PADD 
V  refiners  all  receive  special  consideration  under  the 
Entitlements  Program  similar  to  that  received  under  the 
MOIP.   The  only  change  in  the  focus  of  the  regulations 
appears  to  be  the  direction  of  price  controls.  Whereas 
before  the  Embargo,  domestic  oil  prices  were  supported  at  a 
higher  level  than  would  have  been  obtained  by  market  forces, 
the  current  regulations  maintain  them  at  a  lower  level  than 
the  "free"  market  price. 

("The  Effect  of  Legislative  and  Regulatory  Actions",  supra  note  3,  at  59.) 

The  last  sentence  in  the  above  quote  sums  up  the  basic  question:  is  the 
effect,  if  not  purpose,  of  the  tax  to  drive  domestic  prices  up  or  to  hold  them  down?   If 
there  is  a  differential  in  tax  between  foreign  and  domestic  oil  as  a  result  of  the  tariff, 
who  gets  the  benefit  of  the  differential?  Who  administers  it?   Will  all  or  some  of  the 
differential  be  taken  in  taxes  on  domestic  oil  or  not  -  e.g..  the  revival  of  the  Windfall 
Profit  Tax?   Are  there  those  who  should  be  sheltered  or  subsidized  by  means  of  the 
taxes?   Should  those  who  live  in  States  where  the  imports  arrive  pay  all  of  the  tariff  or 
should  some  method  be  devised  to  spread  the  tariff  to  other  regions?  Or  should  the 
States,  such  as  those  on  the  Eastern  Seaboard,  be  exempted  from  the  import  tax  and  the 
tax  rerouted  to  other  regions? 


'Some  recommended  sources  for  further  study  are  Reserves  and  Natural  Gas  Division  Office  of 
Oil  and  Gas,  U.S.  Department  of  Energy,  "A  Chronology  of  Major  Oil  and  Gas  Regulations  Issued 
Through  October  1985",  D0E/EIA-M016  (1986);  Energy  Information  Agency,  U.S.  Department  of 
Energy,  "The  Impact  of  the  Entitlements  Program  on  the  Market  for  Residual  Fuel  Oil  on  the  East  Coast" 
DOE/EIA  0184/29  (February  1980);  Energy  Information  Agency,  U.S.  Department  of  Energy,  "The  Effect 
of  Legislative  and  Regulatory  Actions  on  Competition  in  Petroleum  Markets",  DOE/ElA-0201/2  (October 
1979);  Energy  Information  Agency,  U.S.  Department  of  Energy,  "EffecU  of  Oil  Regulation  on  Prices  and 
Quantities:  A  Qualitative  Analysis",  DOE/EIA-0201/1  (October  1979);  Energy  Information  Agency,  U.S. 
Department  of  Energy,  "Effects  of  Oil  Regulation  on  Prices  and  Quantities:  A  QualiUtive  Analysis", 
DOE/EIA-0184/3  (May  1979);  Energy  Information  Agency,  U.S.  Department  of  Energy,  "The  Effect  of 
Legislative  and  Regulatory  Actions  on  Competition  in  Petroleum  Markets",  DOE/EIA-0 187/7  (April  1979); 
Energy  Information  Agency,  U.S.  Department  of  Energy,  "Proposed  Amendments  to  the  Entitlements 
Program  with  Respect  to  Imported  Residual  Fuel  Oil",  DOE/ElA-0102/30  (July  1978). 


1261 


These  are  some  of  the  issues  that  arise  whenever  an  oil  import  fee,  tax,  or 
quota  is  considered.   These  and  other  issues  are  thoroughly  explored  in  "A  Critical 
Evaluation  of  Petroleum  Import  Tariffs:  Analytical  and  Historical  Perspectives",  Bureau 
of  Economics  Staff  Report  to  the  Federal  Trade  Commission  (April  1987).   Particularly 
recommended  for  review  is  the  Conclusion  on  page  31,  wherein  the  inevitability  of 
appealing  to  the  political  process  for  "special  deals"  is  discussed,  since  "substantial 
economic  benefits  would  accrue  to  parties  who  obtained  exemptions  from  a  tariff  that 
allow  them  to  import  without  restrictions.   Such  special  deals  could  take  the  form  of 
exemptions  for  certain  products,  for  products  imported  from  certain  countries,  or  just  for 
imports  by  certain  firms."   Furthermore,  page  56  of  the  same  report  states: 

In  the  course  of  designing  and  implementing  a  tariff,  various 
parties  will  seek,  and  likely  obtain,  special  exemptions.  Such 
exemptions,  whether  for  certain  products,  firms,  or  countries 
exporting  to  the  United  States,  would  be  particularly  valuable 
to  the  favored  groups.   However,  tariff  revenues  would 
probably  be  reduced  as  a  result,  and  administrative  costs 
would  likely  be  increased.   Moreover,  many  of  these  special 
exemptions  would  encourage  inefficient  U.S.  production  of 
refined  petroleum  products  and  of  other  products.   As  a 
result,  the  U.S.  would  become  less  competitive  in  world 
markets.   All  of  the  above  points  suggest  that  the  social  costs 
of  a  tariff  would  be  greater  than  our  estimates.   Similar  costs 
are  likely  if  other  policies  are  used  to  aid  the  oil  industry. 

The  oil  import  fee,  or  tax,  or  tariff,  or  quota  died  a  natural  and  welcome 
death  over  a  decade  ago.  Please  let  it  rest  in  peace. 

If  it  is  to  be  revived,  please  then  provide  for  sufficient  exemptions  to 
maintain  parity  of  the  domestic  manufacturing  industry  with  foreign-based  manufacturing 
industry  and  please  maintain  parity  among  the  domestic  manufacturers  so  that  the 
Government  does  not  give  a  competitive  advantage  to  one  segment  over  another. 

Also,  please  set  standards  for  the  bureaucracy  which  will  be  needed  to 
administer  the  program.   Please  assure  that  all  who  ask  to  be  heard  on  the  question  of 
allocations  and  exemptions  -  and  their  adversaries  or  competitors  ~  be  given  a  fair  and 
expeditious  hearing.  The  federal  agency  which  will  be  given  responsibility  for 
administering  the  program  should  be  clearly  identified  fiom  the  start 

D.        A  TAX  OR  TARIFF  ON  FOREIGN  OIL  WILL  NOT  SERVE  TO 
DISPLACE  IMPORTS  GTEMS  A(6)  TO  A(8)). 

This  country,  years  ago,  elected  to  utilize  a  Strategic  Petroleum  Reserve 
("SPR")  as  the  primary  means  of  dealing  with  supply  disruptions.  The  SPR  deals  with 
the  situation  where  foreign  sources  choose  to  cut  off  exports  to  the  United  States.   The 
tax  or  tariff  deals  with  the  situation  where  imports  are  being  discouraged  and, 
presumably,  domestic  sources  gain  the  protection  of  a  tariff  barrier  and  can  raise  prices 
on  current  and  future  production.  The  question  is:  what  can  reasonably  be  expected  as 
a  result? 

For  purposes  of  this  section,  we  assume  the  following  scenario:  there  will 
only  be  a  tax  on  imported  oil  and  imported  refined  petroleum  products;  that  there  will 
be  no  price  controls  imposed  on  domestic  oil  or  product;  that  there  will  be  no  Windfall 
Profit  Tax  imposed  on  the  domestic  production;  that  the  tax  will  act  as  a  tariff  barrier 
allowing  all  domestic  prices  to  rise  at  least  to  the  level  of  the  tariff;  and  that  all  of  this 
differential  is  retained  by  the  producers  and  refiners  of  oil. 


1262 


The  first  expectation  that  should  be  considered  is  that  of  regional  fairness. 
It  probably  can  be  taken  as  a  given  that  consuming  States,  particularly  those  along  the 
Eastern  Seaboard,  would  bear  the  brunt  of  an  oil  import  tax.   The  expectation  might  be 
that  producing  states  would  be  the  beneficiaries  of  an  oil  import  fee,  but  this  expectation 
cannot  be  taken  as  a  given.   It  has  been  tested. 

If  there  is  any  State  in  the  Union  which  could  be  expected  to  benefit  from 
the  scenario  stated  above,  it  is  the  State  of  Texas,  a  State  near  and  dear  to  the  hearts,  as 
well  as  the  location  of  plants  of  many  petrochemical  companies.   However,  "an  oil 
import  fee  is  not  likely  to  have  a  significant  impact  on  the  state's  economy."   (Texas 
Economic  Outlook.  "How  Would  an  Oil  Import  Fee  Impact  the  Texas  Economy", 
published  by  the  Center  for  Business  and  Economic  Analysis,  Graduate  School  of 
Business,  Texas  A  &  M  University,  at  5  (February  1992).)  That  quotation  was 
summarizing  the  conclusion  of  the  study  "Impacts  of  Oil  Import  Fees  on  the  Texas 
Economy,"  conducted  at  the  same  institution,  by  Dr.  M.A.M.  Anari,  Research 
Economist,  and  Dr.  Jared  E.  Hazelton,  Director. 

If  there  will  not  be  a  significant  impact  on  the  economy  of  a  producing 
State  as  key  as  Texas,  where  and  how  will  there  be  an  effect?   The  next  expectation  is 
that  an  oil  import  fee  would  be  beneficial  to  the  domestic  oil  industry  and,  therefore,  to 
this  country  by  fostering  a  significant  increase  in  exploration  and  development  of  new  oil 
reserves.   The  objective  then,  of  an  oil  import  tax,  would  be  to  foster  a  significant 
increase  in  exploration  and  development  of  new  oil  reserves. 

PEG  will  yield  to  none  in  associating  with  the  view  that  it  is  extremely 
important  that  there  be  a  healthy  and  viable  domestic  oil  and  gas  industry  and  that 
encouragement  for  exploration  and  development  of  new  oil  reserves  is  indeed  important 
Therefore,  any  possible  "stimulus'  for  exploration  and  development  should  be  carefully 
considered. 

The  question  is,  is  a  tariff  on  imported  oil  an  effective  answer  to  the  need 
for  exploration  and  development  of  new  domestic  oil  and  gas  reserves? 

We  think  not.   The  problem  involving  exploration  and  production  of  new 
oil  reserves  is  not  going  to  be  solved  or  even  addressed  by  a  tariff  on  imported  oil  or  any 
indirect  subsidy  to  some  or  all  domestic  oil  production  and  refining.  What  is  needed  is 
access  to  promising  new  sources  of  domestic  supply  for  the  purpose  of  exploration  and 
production.   The  problem  is  caused  by  the  fact  that  it  is  the  national  policy  of  this 
country  to  deny  access  to  promising  new  sources  of  domestic  supply. 

Perhaps  the  best  way  to  demonstrate  this  last  point  is  to  quote  from  the 
Report  to  Stockholders  of  the  Chevron  Corporation  for  the  First  Quarter  of  1993.   The 
headline  on  page  five  and  the  first  two  paragraphs  are  quoted: 

CHEVRON  IS  SHIFTING  EXPLORATION  AND 
PRODUCTION  EFFORTS  OVERSEAS. 

Chevron  is  shifting  its  exploration  and  production  emphasis 
to  areas  with  the  strongest  potential  for  large  discoveries 
and  cost-effective  production.  Vice  Chairman  Dennis  Bonney 
told  stockholders. 

"Most  of  the  new  opportunities  lie  outside  the  United  States," 
he  explained.   This  is  partly  because  most  of  the  world's 
"truly  attractive  untapped  petroleum  reserves  are  overseas." 
Also,  "many  U.S.  Regions  with  high  potential  have  been 
placed  out  of  the  industry's  reach  by  government  actions." 


1263 


The  Office  of  Technology  Assessment  ("OTA"),  an  ann  of  the  Congress,  in 
its  October  1991  summary  "U.S.  Oil  Import  Vulnerability:  The  Technical  Replacement 
Capability"  at  17,  indicates  a  similar  conclusion: 

The  scarcity  of  new  opportunities  for  finding  large  new  oil 
fields  within  the  mature  oil  regions  of  the  lower  48  States  has 
created  pressure  for  the  Federal  Government  to  open  to 
exploratory  drilling  and  development  a  number  of  promising 
areas  currently  off-limits  to  such  activities,  such  as  the  Arctic 
National  Wildlife  Refuge  (ANWR),  offshore  California,  and 
other  frontier  areas. 

The  OTA  notes  on  that  same  page  that  DOI  has  estimated  that  ANWR 
has  a  46%  chance  of  recovering  3.6  billion  barrels  --  "a  potential  resource  equivalent  to 
the  third  largest  discovery  in  U.S.  territory  and  one  that,  for  a  few  decades,  could  deliver 
several  hundred  thousand  barrels  of  crude  oil  per  day  to  the  lower  48  States."   Id. 
(footnote  omitted). 

These  statements  by  a  major  oil  company  and  the  OTA,  we  fear,  reflect  all 
too  well  the  current  situation.   This  nation  cannot  expect  to  maintain  its  ability  to 
produce  and  to  refine  domestic  oil  even  at  current  levels  if  access  to  the  resource  bases 
are  denied  by  the  Federal  Government. 

We  recognize  that  this  is  an  unpopular  subject.   We  know  full  well  that  the 
National  Energy  Strategy  called  for  "environmentally  responsible  development  of 
promising  areas  like  ANWR  and  OCS."  (National  Energy  Strategy,  supra,  at  3.)   We  are 
aware  that  legislation  to  achieve  that  result  died  on  the  floor  of  the  Senate  and  did  not 
make  it  to  the  Energy  Policy  Act  of  1992.   (137  Cong.  Rec.  S15,754  (daily  ed.  Nov.  1, 
1991)(Rollcall  Vote  No.  242,  failure  to  invoke  cloture  on  motion  to  proceed  to 
consideration  of  S.  1220,  National  Energy  Security  Act  of  1991).)  To  us,  the  conclusion 
to  reach  is  that  the  Congress  is  not  presently  prepared  to  address  issues  related  to  access 
to  the  resource  base  for  new  domestic  oil  reserves.   Whether  that  is  good  or  bad  public 
policy  makes  no  difference  here.   It  is  the  fact. 

The  inescapable  corollary  is  that  higher  and  higher  percentages  of  oil 
imports  must  be  accepted.   Without  a  significant  increase  in  access  to  potential  reserves 
in  this  country  for  the  purposes  of  exploration  and  production,  imports  are  bound  to 
increase  in  volume,  and  the  question  is  not  whether,  but  where,  the  imports  come  from. 
Taxing  the  imports  only  adds  to  the  cost. 

As  Section  B  demonstrates,  an  oil  import  fee  is  a  poor  source  of  revenues. 
Section  B  assumes,  arguendo,  that  an  import  tax  will  be  collected  on  all  foreign  oil  and 
all  foreign  refined  petroleum  products.   This  assumption  is  extremely  unlikely  to  be 
achieved  in  practice,  thereby  both  reducing  anticipated  tax  revenues  and  increasing 
administrative  costs  to  the  Government  and  extraneous  costs  to  the  economy.   The 
expectation  would  be  that  some  countries'  exports  to  the  United  States  would  be 
exempted  from  the  tax. 

Where  the  imports  come  from  raises  this  thorny  issue  for  those  who  would 
impose  a  tax  on  imports:  would  any  foreign  source  be  exempt?   Canada,  for  example, 
under  the  Free  Trade  Agreement?   What  about  the  other  countries  who  now  provide  oil 
to  the  United  States?   According  to  the  EIA,  some  32  countries  other  than  Canada  have 
exported  to  the  United  States  continually  or  from  time  to  time  over  the  last  twenty 
years.    (Office  of  Energy  Markets  and  End  Use,  U.S.  Department  of  Energy,  Monthly 
Energy  Review.  Tables  3.3(a-h),  DOE/EIA-0035(93/07)(July  1993).)   Would  the 
Congress  exempt  any  foreign  source  from  an  import  tax?   Or  would  that  be  a  decision 
for  the  Administration  to  make? 


1264 


The  GAO,  in  its  1986  Report  entitled  "Petroleum  Products,  Effect  of 
Imports  on  U.S.  Oil  Refineries  and  U.S.  Energy  Security",  had  this  admonition: 

Possible  side  effects  should  also  be  considered  in  weighing 
the  desirability  of  tariffs  or  quotas.   One  such  side  effect  is 
the  potential  for  retaliatory  trade  measures  by  other  nations 
in  response  to  U.S.  tariffs  or  quotas.    For  example,  product- 
exporting  nations  could  establish  restrictions  on  purchases  of 
U.S.  products,  or  reduce  cooperation  with  the  United  States 
in  other  areas.    In  addition,  other  product-importing  nations, 
principally  members  of  the  European  Economic  Community 
and  Japan,  may  respond  to  U.S.  trade  restrictions  with 
restrictions  of  their  own.   As  we  noted  in  chapter  3,  Japanese 
government  officials  have  indicated  a  possible  relaxation  of 
its  ban  on  imports  of  gasoline  and  other  products,  and  the 
Conmiunity  presently  does  not  enforce  trade  restrictions 
against  Saudi  Arabia,  Kuwait,  and  other  major  product- 
exporting  nations.   Retaliatory  measures  by  these  countries  to 
restore  or  augment  trade  barriers  could  undermine  the 
effectiveness  of  the  U.S.  trade  restrictions. 

(General  Accounting  Office,  "Petroleum  Products,  Effect  of  Imports  on  U.S.  Oil 
Refineries  and  U.S.  Energy  Security",  GAO/RCED-86-85  at  63  (April  1986).) 

In  sum,  imposing  an  oil  import  tax  is  not  going  to  do  anything  to  increase 
access  to  the  most  promising  potential  new  reserves  of  oil.   If  the  State  of  Texas  is  a 
good  representative  of  a  producing  state,  an  oil  import  tax  will  not  do  much  regional 
good  while  harm  to  other  regions  is  manifest.   A  host  of  international  trade  and  other 
considerations  come  into  play  if  the  tax  is  imposed  on  some  countries  but  not  on  others. 
To  the  extent  that  country  of  origin  exemptions  are  given,  tax  revenues  are  reduced  and 
the  regulatory  mechanism  must  police  the  imports  to  be  sure  that  the  'country  of  origin" 
is  not  simply  a  paper  transfer  on  the  high  seas,  with  delivery  by  displacement. 

E.         CONCLUSION 

We  respectfully  suggest  that  we  have  demonstrated  that: 

•  An  oil  import  tax  is  a  poor  way  to  raise  revenues,  the  ultimate  cost 
in  jobs,  in  competitiveness,  in  other  government  outlays,  far  exceeding  any  benefit. 

•  The  failures  of  the  past  efforts  to  use  a  tax  on  imported  oil,  ranging 
from  regulation  of  domestic  oil.  Windfall  Profit  Taxes,  and  a  bureaucracy  allocating 
competitive  advantages  and  trying  to  achieve  regional  equity  in  prices  of  oil,  should  not 
again  be  visited  on  the  American  people. 

•  An  oil  import  tax  will  not  address  the  problem  of  access  to  new 
sources  of  domestic  oil  and  will  induce  problems  with  foreign  sources,  particularly  if 
there  is  selective  or  discriminatory  application. 

The  recommended  solution  is  to  refrain  from  imposing  any  tax  on 
imported  oil  or  refined  petroleum  products. 


1265 

Mr.  Payne.  Our  next  witnesses  will  testify  concerning  the  sever- 
ance tax  on  hard  rock  minerals.  Representing  the  Mineral  Re- 
sources Alliance  and  the  American  Iron  Ore  Association  are  Steve 
Alfers,  counsel,  and  John  Kelly,  tax  counsel  for  the  American  Iron 
Ore  Association. 

Please  proceed. 

STATEMENT  OF  STEPHEN  D.  ALFERS,  COUNSEL,  MINERAL 
RESOURCES  ALLIANCE 

Mr.  Alfers.  Thank  you,  Mr.  Chairman.  I  am  Steve  Alfers,  a 
partner  in  the  law  firm  of  Morrison  &  Foerster  from  Denver,  Colo. 
I  appreciate  the  opportunity  to  be  here  today  on  behalf  of  the  Min- 
eral Resources  Alliance,  an  association  of  more  than  1,000  mining 
companies,  vendors  and  their  supporters. 

I  nave  submitted  to  the  committee  a  written  statement  and  I 
would  refer  the  committee  to  that  statement.  My  comments  here 
today  will  be  brief. 

We  oppose  the  severance  tax  proposal.  We  think  it  has  four  very 
serious  problems.  First,  the  proposal  does  not  define  either  a  meth- 
od of  calculation  or  the  basis  of  the  severance  tax.  The  proposal 
calls  for  a  12  percent  tax  on  hard  rock  minerals,  but  does  not  speci- 
fy what  minerals  are  to  be  taxed,  the  basis  upon  which  the  tax 
would  be  calculated  or  whether  the  taxes  be  levied  on  minerals 
from  public  lands,  private  lands  or  both. 

We  can't  tell  whether  the  tax  would  be  limited  to  metals  or  also 
include  nonmetallic  minerals,  industrial  minerals  such  as  talc  and 
some  of  the  strategic  minerals,  the  rare  earths,  or  even  ferrous 
metals.  No  data  has  been  assembled  to  determine  the  revenue  im- 
pacts of  the  tax.  No  detailed  financial  or  economic  analysis  of  the 
proposed  tax  exists  from  which  an  accurate  projection  of  revenues 
could  be  determined.  Revenue  projections  would  be  guess  work. 

Congress  should  not  consider  this  new  tax  without  first  conduct- 
ing a  study  to  determine  the  revenue  impact  of  the  tax.  It  is  impos- 
sible to  predict  the  impact  of  the  proposed  severance  tax  without 
applying  that  tax  to  real  numbers  from  real  existing  hard-rock 
mining  projects.  Short-term  economic  analysis  is  especially  mis- 
leading in  the  mining  industry. 

Economic  projections  should  be  based  on  long-term  economic 
analysis  and  the  models  should  incorporate  actual  financial  and 
production  data  from  U.S.  mining  operations  covering  a  variety  of 
metallic  and  nonmetallic  mineral  deposits.  Producing  gold  is  not 
like  producing  lead  or  uranium  or  copper  or  zinc  or  beryllium  or 
other  industrial  minerals  or  almost  any  other  mineral,  and  it  is  a 
mistake  to  try  to  project  economic  impacts  based  on  anecdotal  in- 
formation about  a  single  metal  or  a  single  gold  mine. 

Finally,  based  on  economic  studies  of  the  U.S.  mining  industry, 
it  is  likely  that  the  net  Federal  impact  would  be  negative. 

A  recent  study  by  Coopers  &  Lybrand  and  Morrison  &  Foerster 
showed  that  a  Federal  royalty  on  hard  rock  minerals  had  a  nega- 
tive economic  impact  and  high  Federal  royalties  in  the  range  of  8 
to  12  percent  had  a  negative  impact  on  the  Federal  Treasury. 

Severance  tax  on  minerals  in  public  lands  would  have  a  similar 
impact  and  a  severance  tax  that  would  extend  to  minerals  on  pub- 
lic and  private  lands  would  have  a  greater  impact.  This  could  be 


1266 

translated  to  jobs.  Some  mines  would  close.  Other  mines  would 
downsize  and  contract  their  operations,  shorten  their  mine  lines, 
throw  off  employees. 

Perhaps  the  biggest  economic  impact  would  be  from  mine  con- 
struction projects  on  the  drawing  board  that  would  no  longer  go 
forward.  These  would  just  simply  drop  off.  That  would  mean  loss 
of  jobs  and  tax  revenues  and  loss  of  exports.  We  can  calculate  that. 
What  we  can't  calculate  is  the  fact  that  many  mines  would  never 
be  discovered,  because  the  exploration  dollars  would  migrate  over- 
seas at  the  bleak  economics  prospects  here. 

We  continue  to  need  the  gold  and  silver  and  copper  and  lead  and 
zinc  and  beryllium,  platinum,  chrome,  uranium,  and  many  other 
commodities,  some  of  which  we  haven't  even  discovered  yet.  That 
loss  is  incalculable.  Since  1989,  Congress  has  been  considering  re- 
form of  the  general  mining  law  governing  mining  on  public  lands 
in  the  United  States.  A  bill  reforming  me  mining  law  has  now 
passed  the  Senate  and  action  is  expected  in  the  House  this  year, 
perhaps  next  month.  Both  bills  substantially  reform  the  mining 
laws. 

New  mining  fees  and  royalty  on  production  are  part  of  both  bills. 
These  fees  and  royalties  portend  an  enormous  impact  on  mining. 
In  anticipation  of  these  bills,  industry  has  already  reduced  its  hold- 
ing of  mining  claims  in  the  United  States  by  one  half  Some 
sources  expect  a  decline  in  holding  of  mining  claims  by  up  to  80 
percent. 

U.S.  exploration  dollars,  a  clear  signal  of  whether  production  will 
come  in  the  future,  are  already  migrating  overseas.  This  is  not  the 
time  to  entertain  new  taxes  on  the  mining  industry.  A  wiser  course 
is  to  let  mining  law  reform  play  out  over  these  next  few  weeks. 
Then  Congress  can  watch  carefully  over  the  next  few  years  the  eco- 
nomic impact  of  mining  law  reforms  before  considering  new  taxes 
on  this  beleaguered  industry. 

Thank  you,  Mr.  Chairman. 

[The  prepared  statement  follows:] 


1267 


HEARING  ON  MINERAL  SEVERANCE  TAX  ISSXTES 

BEFORE  THE 

SX7BC0MMITTEE  ON  SELECT  REVENCTE  MEASURES 

COMMITTEE  ON  NAYS  AND  MEANS 

U.S.  HOUSE  OF  REPRESENTATIVES 

WRITTEN  STATEMENT 

OF 

STEPHEN  D.  ALFERS 

ON  BEHALF  OF 

THE  MINERAL  RESOURCES  ALLIANCE 

SEPTEMBER  8,  1993 


On  August  17,  1993,  the  Honoraibie  Charles  B.  Rangel 
announced  hearings  to  be  held  before  the  Subcommittee  on 
Select  Revenue  Measures  of  the  House  Ways  and  Means 
Committee  on  September  8th  and  September  14th.   I  appreciate 
the  opportunity  to  offer  testimony  on  September  8,  1993  on 
the  impact  of  a  12%  severance  tax  on  the  mining  industry. 
This  written  statement,  which  supplements  my  Preliminary 
Statement  offered  on  September  8,  contains  my  assessment  of 
this  proposed  severance  tax. 

INTRODUCTION 

Since  1989,  Congress  has  been  considering  reform  of 
the  General  Mining  Law  governing  mining  on  public  lands  in 
the  United  States.   A  bill  reforming  the  mining  law  has 
passed  the  Senate  (S.775)  and  action  is  expected  in  the 
House  this  month  or  next. 

Both  bills  substantially  reform  the  mining  laws. 
New  mining  fees  and  royalty  on  production  are  part  of  both 
bills.   These  fees  and  royalties  portend  an  enormous  impact 
on  mining.   In  anticipation  of  these  bills,  industry  has 
already  been  adversely  affected.   The  U.S.  mining  industry 
has  already  reduced  its  holdings  of  mining  claims  by  more 
than  one-half  --  some  sources  expect  close  to  60% -80% 
reductions  --   and  U.S.  exploration  expenditures,  a  clear 
signal  of  future  production,  are  already  migrating  overseas. 

This  is  not  the  time  to  entertain  new  taxes  on  the 
mining  industry.   The  wise  course  is  to  let  Mining  Law 
reform  play  out  over  these  next  few  weeks.   The  Congress 
should  watch  carefully  the  economic  impact  of  Mining  Law 
reform  before  considering  new  taxes  on  this  beleaguered 
industry. 


There  are  four  fundamental  problems  with  the 
proposed  severance  tax:   l)  The  proposal  does  not  define  the 
method  of  calculation  or  the  basis  of  the  severance  tax, 
2)  no  verifiable  data  has  been  assembled  to  determine  the 
revenue  impacts  of  the  tax,  3)  Congress  should  not  entertain 
such  a  proposal  without  conducting  a  study  to  determine  the 
revenue  impacts  of  the  tax,  and  4)  based  upon  previous 


1268 


studies,  it  is  likely  that  the  net  federal  revenue  impacts 
of  such  a  tax  would  be  negative.   I  will  address  each  of 
these  points  below. 

1.   The  ProDoaal  la  Vaoue 

The  proposed  severance  tax  calls  for  a  12%  tax  on 
"hard  rock"  minerals,  "such  as  gold,  silver  and  copper." 
The  proposal,  however,  describes  neither  the  minerals  to  be 
taxed,  the  basis  upon  which  the  tax  will  be  calculated,  nor 
whether  the  tax  will  be  levied  on  minerals  produced  from 
both  public  and  private  lands. 

Perhaps  the  proposal  would  impose  a  tax  only  on 
gold,  silver  and  copper,  or,  perhaps,  all  metallic  minerals 
(sweeping  in  lead,  zinc,  platinum,  chromium,  and  beryllium, 
to  name  just  a  few) .   Or  perhaps  the  proposal  is  to  reach 
"locatable  minerals."^ 

If  the  tax  is  to  be  applied  to  all  minerals,  it 
will  have  an  enormous  direct  impact  on  nearly  every  state  in 
the  country.   If  the  tax  is  to  be  levied  only  on  "locatable" 


1   The  list  of  locatable  minerals  could  include  the 
following  list  of  minerals:   gold,  silver,  cinnabar,  lead, 
tin,  copper,  building  stone,  salt  springs  and  other  deposits 
of  salt,  gilsonite,  elaterite  or  other  like  substances, 
kaolin,  kaolinite,  fuller's  earth,  china  clay  and  ball  clay, 
phosphate,  nitrate,  potash,  asphaltic  minerals,  sodium, 
borax,  sulphur,  agate,  albertite,  alkaline  substances,  alum, 
aluminum,  cyanite,  amber,  amphibole  schist,  amygdaloid 
bands,  asbestos,  asphalt,  barium,  bauxite,  bentonite, 
beryllium,  borates,  brine,  calc-spar,  cement,  auriferous 
cement,  chalk,  French  chalk,  clays,  colemanite,  kaolin, 
diainonds,  diatomaceous  earth,  fahlbands,  galena,  gilsonite, 
gravel,  sand,  granite,  graphite,  guano,  gypsum,  gypsum 
cement,  infusorial  earth,  iron,  chromate  of  iron,  oxide  of 
iron,  franklinite,  isinglass,  lead,  black  lead,  carbonate  of 
lead,  lepidolite,  limestone,  magnesia,  magnesite,  marble, 
texicalli  marble,  meteorites,  mica,  shale,  ochre,  oil  and 
gas,  oil  shale,  onyx,  opal,  ozocerite,  paint  rock,  paint 
stone,  platinum,  plumbago,  resin,  pumice,  salines, 
saltpeter,  sandstone,  silicate,  silicated  rock,  slate, 
natural  slate,  roofing  slate,  soda,  carbonate  of  soda, 
nitrate  of  soda,  sulphate  of  soda,  stone,  beds  of  stone, 
building  stone,  flint  stone,  free  stone,  iron  stone, 
limestone,  lithographic  stone,  lustral  stone,  stockwerke, 
sulphate,  tailings,  tin,  trap  rock,  tungsten,  umber, 
ulexite,  volcanic  ash  or  pumice,  mineral  white  quartz 
suitable  for  making  glass,  zeolites,  zinc,  carbonate, 
silicate  and  sulphide  of  zinc,  tungsten,  uranium,  vanadium 
and  zirconium.   See.  Ricketts,  American  Mining  Law.  4th  ed. 
1943,  Vol  I  §  11.   All  of  these  minerals  are  "locatable" 
under  the  1872  Mining  Law,  though  their  locatability  has 
been  constrained  by  a  number  of  subsequent  federal  statutes, 
including  the  Mineral  Leasing  Act  of  1920,  the  Materials  Act 
of  July  31,  1947,  as  amended  by  the  Common  Varieties  Act  on 
July  23,  1955,  and  the  Act  of  September  28,  1962.   In 
determining  what  minerals  would  be  taxed,  the  "locatable" 
label  complicates  rather  than  simplifies. 


1269 


minerals  or  metallic  minerals,  the  tauc  will  have  a 
disproportionately  large  direct  impact  on  the  western  states 
where  most  of  that  mineral  production  occurs.   But  the  tax 
would  also  have  a  tremendous  indirect  impact  on  those 
states  --  chiefly  in  the  midwest  and  the  mid-Atlantic  -- 
which  supply  the  machinery  and  supplies  used  in  metals 
mining. 

The  value  of  a  mineral  increases  as  it  progresses 
through  various  processing  stages,  reflecting  the  value  (and 
expense)  added  by  the  mine  operator.   A  severance  tax  levied 
on  the  value  of  the  mineral  immediately  upon  severance  from 
the  ground  will  yield  different  results  than  a  tax  levied  on 
the  value  of  the  mineral  as  a  finished  product.   Depending 
upon  the  stage  at  which  the  tax  is  levied  and  the  expense 
deductions  allowed  from  the  taixaJale  basis,  a  severance  tax 
may  result  in  higher  or  lower  payments,  and  correspondingly 
greater  or  lesser  financial  burdens  on  mineral  production. 

A  number  of  states  impose  a  severance  tax  on 
minerals  in  the  form  of  carefully  and  completely  defined 
statutes  which  set  forth  the  basis  for  those  taxes.   The 
federal  severance  tax  proposal  provides  no  detail  as  to  the 
method  of  calculation.   Without  that  detail,  even 
speculation  about  the  revenue  impact  of  the  proposal  is 
difficult. 

A  substantial  percentage  of  the  value  of  minerals 
mined  in  the  United  States  is  derived  from  mines  on  private 
lands.   A  severance  taix  on  minerals  extracted  from  public 
lands  only  would  fail  to  capture  a  significant  portion  of 
the  value  of  mineral  production  in  the  U.S.   The  rationale 
behind  a  severance  teix  only  on  mineral  production  from 
public  lands  is  difficult  to  fathom.   On  the  other  hand, 
mines  on  private  land  are  generally  already  subject  to 
private  royalties  and  state  severance  tauces .   The  imposition 
of  an  additional  tajc  on  those  operations  may  render  some  of 
them  unprof iteible,  thus  potentially  creating  a  net  negative 
treasury  impact.   In  addition,  a  tsoc  on  all  lands  would 
affect  all  states  in  which  there  is  mining,  rather  than  just 
the  western  states  in  which  hard  rock  minerals  from  public 
lands  are  produced. 2  The  potential  effect  of  such  a  tax  on 


2   Among  the  states  with  locateible  mineral  production  or 
development  targets  in  1990  were:   Alabama,  Alaska,  Arizona, 
Arkansas,  California,  Colorado,  Connecticut,  Florida, 
Georgia,  Idaho,  Illinois,  Indiana,  Iowa,  Kansas,  Maine, 
Michigan,  Minnesota,  Missouri,  Montana,  Nevada,  New  Mexico, 
New  York,  North  Carolina,  Oklahoma,  Oregon,  South  Carolina, 
South  Dakota,  Tennessee,  Texas,  Utah,  Vermont,  Virginia, 
Washington,  Wisconsin  and  Wyoming.   With  respect  to  mining 
employment  figures,  we  do  not  have  detailed  data  on  mining 
employment  broken  down  by  state.  We  do,  however,  have  data 
provided  by  the  U.S.  Department  of  Interior,  Bureau  of 
Mines,  that  in  1990,  the  total  employment  in  metal  mining 
was  179,100.   See  Mineral  Commodity  Summaries  1991,  U.S. 
Department  of  Interior,  Bureau  of  Mines,  p.  4.   The  same 
publication  estimates  1990  employment  in  non-metallic 
minerals  (except  fuels)  and  non-fuel  organic  minerals  at  a 
total  of  274,000.  IsL.   at  Table  1,  p.  5. 


1270 


states  like  Michigan  and  Minnesota,  which  have  significant 
iron  ore  production,  Missouri,  which  has  significant  lead 
production,  Tennessee,  which  has  significant  zinc 
production,  South  Carolina,  which  has  substantial  gold 
production,  Florida,  which  has  significant  phosphate 
production.  New  York,  which  has  lead  and  silver  production, 
and  Virginia  and  Vermont,  which  have  talc  production,  would 
be  substantial  and  would  likely  result  in  some  mine  closures 
and  job  losses  in  those  states. 

2.   Lack  of  Financial  and  Economic  Analvsia 

We  are  aware  of  no  detailed  financial  or  economic 
analysis  of  the  proposed  severance  tax.   In  light  of  the 
lack  of  detail  concerning  the  structure  of  the  severance  tax 
(as  discussed  above) ,  such  an  analysis  could  not  be 
performed  in  any  but  a  speculative  manner.   It  is  dangerous 
to  project  revenues  from,  a  mining  tax  without  economic 
analysis.   For  example,  one  might  try  to  estimate  tax 
revenues  from  historic  production  estimates.   That  approach 
assumes  that  production  levels  in  the  hard  rock  minerals 
industry  will  remain  constant  independent  of  external 
factors  other  than  the  imposition  of  a  severance  tax.   It 
also  assumes  that  levels  of  hard  rock  mineral  production 
would  remain  constant  despite  the  increased  production  costs 
that  would  be  associated  with  the  imposition  of  a  severance 
tax.   We  know  that  in  the  metals  mining  industry,  taxes, 
fees  and  royalties  cannot  be  absorbed  by  passing  on  the 
costs  of  the  severance  tax  to  consumers.   In  fact,  the 
demand  for  most  U.S . -produced  hard  rock  minerals,  for 
excimple,  gold,  is  almost  perfectly  elastic.   As  a  result, 
hard  rock  miners  in  most  cases  could  not  pass  the  additional 
costs  imposed  by  a  severance  tax  on  to  consumers,  and  would 
have  to  otherwise  cover  those  costs  by  reducing 
expenditures.   Especially  over  the  long-term,  this  would 
result  in  a  substantial  negative  economic  impact,  decrease 
in  production  levels,  and  erosion  of  the  severance  tax  base. 

In  the  short-term,  it  is  difficult  to  speculate  as 
to  whether  the  imposition  of  a  severance  tax  would  cause 
companies  to  close  existing  mines.   Over  the  long-term,  and 
in  light  of  the  fact  that  increased  costs  cannot  be  absorbed 
by  creating  higher  commodity  prices,  the  sheer  magnitude  of 
a  12%  severance  tax,  especially  if  based  on  gross  proceeds 
or  gross  revenues,  would  be  such  that  many  new  projects 
would  no  longer  be  economic  and  many  producing  mines  would 
not  be  replaced  once  they  were  exhausted.   It  is  this 
decrease  in  the  investment  activity  of  replacing  existing 
mines  that  would  cause  a  significant  reduction  in 
expenditures  by  the  industry  and  concomitant  negative 
economic  impacts.   Those  impacts  include  job  losses  as  well 
as  reductions  in  expenditures.   They  also  include  lost 
personal  and  corporate  income  taxes  which  are  likely 
ultimately  to  be  greater  than  the  increased  revenues  to  the 
federal  treasury  resulting  from  the  imposition  of  the  tax. 

Congress,  of  course,  has  already  learned  this 
lesson.   The  recent  experience  with  the  "luxury  tax"  is  a 
good  indicator  of  how  taxes  that  are  not  passed  along  to 
consumers  are  detrimental  to  the  industries  they  are  applied 
to  and,  because  of  the  resulting  negative  economic  impacts. 


1271 


are  not  revenue  producers .   In  a  more  recent  exeimple  that 
directly  affects  the  mining  industry,  the  Congressional 
Budget  Office  estimated  in  its  testimony  of  May  4,  1993 
before  the  Subcommittee  on  Mineral  Resources  Development 
that  60%  of  all  unpatented  mining  claims  on  public  lands 
would  be  abandoned  after  the  imposition  of  a  new  $lOO/per 
claim  holding  fee.   Jan  Paul  Acton  Testimony,  p.  14.   A 
recent  article  in  the  San  Francisco  Chronicle  estimates  that 
between  50%  and  80%  of  all  mining  claims  will  be  abandoned. 
September  1,  1993,  col.  A5 .   As  a  result  of  high  levels  of 
claim  abandonment,  the  revenue  impacts  of  the  $100  holding 
fee  are  likely  to  be  smaller  than  anticipated.   This  very 
recent  experience  with  mining  holding  fees  demonstrates  that 
the  mining  industry  cannot  simply  pass  on  the  costs. 
Accordingly,  Congress  should  be  skeptical  of  the  revenue- 
raising  potential  of  a  tax  resting  on  the  errant  assumption 
that  higher  costs  will  not  change  either  industry  behavior 
or  consumer  behavior. 

The  main  point  here  is  that  it  is  important  to 
define  the  purpose  of  the  severance  tcuc.   As  a  revenue 
raising  device,  the  tax  may  or  may  not  serve  its  purpose. 
Only  a  thorough  economic  analysis  will  demonstrate  its 
success  or  failure  on  that  score.   If  the  purpose  of  the  tax 
is  to  raise  money  to  deposit  in  a  fund  to  clean  up  abandoned 
mines  or  Superfund  sites  (two  very  different  problems) ,  the 
Committee  should  avoid  committing  funds  before  it  has 
defined  the  problem.   In  Burden  of  Gilt,  a  broadside 
published  by  the  Mineral  Policy  Center  ("MPC")  on  July  20, 
1993,  the  MPC  called  for  creation  of  a  federal  hardrock 
abandoned  mine  cleanup  fund.   The  MPC  report  was  an  advocacy 
piece  by  a  special  interest  group.   It  was  draimatic  and 
insistent.   It  was  also  misleading.   The  MPC  report  asserts 
that  the  mining  industry  is  practically  unregulated.   The 
report  asserts  that  vast  sums  (approximately  $71.5  billion) 
are  necessary  to  clean  up  the  mess  that  mining  has  made.   In 
his  excellent  September  9,  1993  critique  of  the  MPC  report, 
Steve  Barringer  of  Holland  &  Hart  pointed  out  that  MPC's 
cost  estimates  for  cleanup  of  abandoned  mine  sites  are  not 
only  undocumented,  but  erroneously  include  the  cost  of 
cleaning  up  Superfund  sites,  which  have  already  been  funded 
under  the  Superfund  laws.   As  Mr.  Barringer  points  out,  this 
double  counting  drastically  inflates  the  MPC's  estimated 
cost  of  abandoned  mine  cleanup  operations.   In  conclusion, 
the  Committee  is  considering  proposing  a  tax  whose  terms  are 
undefined,  and  the  purpose  of  which  is  murky,  at  best. 

The  problem  of  abandoned  mines  on  public  lands 
deserves  careful  study  and  deliberate  analysis.   We  must 
first  enlist  the  States  in  building  an  inventory  of  sites 
and  establishing  reclamation  goals  and  priorities.   Next,  we 
must  consider  private  side  cleanup  scenarios,  before  we 
saddle  the  public  with  a  reclamation  burden.   For  example, 
we  could  dramatically  reduce  the  public  burden  by 
encouraging  private  remining  of  old  abandoned  sites. 
Remining  could  generate  economic  activity  at  a  profit  and 
still  fund  reclamation. 

Abandoned  mine  reclaunation  is  a  complex  problem 
with  a  complex  solution.   It  is  a  terrible  mistake  to  create 
a  new  tax  to  fund  a  program  we  have  not  yet  defined. 


1272 


3 .   An  Bconomic  Analysis  Is  Critical  In  Estimating 
the  Mat  Revenue  Impact  of  the  Proposal 

It  is  impossible  to  predict  the  impact  of  the 
proposed  severance  tax  without  applying  that  tax  to  real 
numbers  from  existing  hard  rock  mineral  projects,  estimating 
changes  in  output  resulting  from  the  increased  costs 
associated  with  the  tax,  and  then  using  those  changes  in 
output  to  derive  the  input  to  the  Department  of  Commerce's 
Regional  Input-Output  Multiplier  system  ("RIMS") . 
Application  of  the  RIMS  multipliers  to  the  changes  in  output 
allows  for  an  estimate  of  the  economic  impact  of  such  a  tax. 

To  perform  such  an  analysis  on  the  proposed 
severance  tax,  one  would  have  to  calculate  the  impacts  of 
that  tax  on  a  representative  sample  of  hard  rock  mining 
projects  during  a  given  year,  extrapolate  those  numbers  up 
to  determine  state -wide  and  industry-wide  impacts,  and  then 
determine  the  economic  impacts  (in  terms  of  job  losses, 
declines  in  revenue  and  reduction  of  economic  output) 
through  application  of  the  RIMS  multipliers.   Such  an 
analysis  can  be  designed  to  avoid  risky  projections  about 
future  trends  and  production  performance.   It  can  instead  be 
constructed  using  a  model  reflecting  the  U.S.  mining 
industry  as  it  actually  existed  in  a  particular  year.   The 
analysis  would  then  look  at  the  financial  and  economic 
impacts  of  the  proposed  tax  on  the  mining  industry  as  it 
actually  existed  in  the  year  selected,  based  on  actual 
price,  cost,  and  production  data  collected  from  individual 
mining  companies.   From  that  "snapshot"  of  the  industry  one 
would  then  be  able  to  infer  what  the  industry  would  look 
like  going  forward.   That  method  will  allow  for  an  analysis 
of  the  impacts  of  the  proposed  tax  over  the  longer  term,  and 
also  for  a  determination  of  which  particular  projects  never 
would  have  begun  because  they  would  have  been  rendered 
uneconomic  by  the  new  tetx. 

In  performing  that  analysis,  all  of  the  guidelines 
listed  below  should  be  followed: 

•  The  analysis  should  use  long-term,  rather  than 
short-term,  estimates  in  deriving  the  impacts  of 
the  proposed  tax.   The  investments  in  the  hard  rock 
minerals  industry  are  relatively  long-term  in 
nature,  with  project  lives  averaging  from  5  to  30 
years.   As  a  result,  it  is  necessary  to  evaluate 
the  impact  of  the  proposed  tax  over  a  time  span 
that  corresponds  to  the  investment  horizon  of  the 
industry. 

•  The  analysis  should  utilize  actual  financial  and 
production  data  from  U.S.  mining  operations. 

•  .  The  analysis  should  account  for  the  regional 

differentiation  of  the  industry.   For  example, 
Colorado  does  not  produce  a  lot  of  hard  rock 
minerals  these  days,  but  the  presence  of  national 
and  regional  mining  company  headquarters  makes 
mining  important  to  Colorado.   Emphasizing  regional 
differentiation  recognizes  that  resource 
reallocation  between  states  or  regions  or  out  of 


1273 


the  mining  industry  into  other  industries  is 
unusual  at  best,  even  over  the  long  term.   That  is 
especially  true  with  capital  and  labor  resources. 
Barriers  to  resource  reallocation  will  be  even 
greater  in  this  case,  because  a  severance  tax 
affects  all  projects  in  all  states.   Workers 
displaced  in  Nevada  will  not  find  mining  jobs  in 
mines  in  California  because  miners  will  be 
displaced  everywhere. 

In  estimating  loss  of  output,  the  analysis  should 
consider  the  reductions  in  expenditures  and 
employment  beyond  the  impacts  on  operating  mining 
projects;  e.g.,  exploration,  development  and 
construction. 

The  analysis  should  consider  the  net  effect  on 
treasury  receipts,  including: 

Loss  of  personal  income  taxes  related  to  lost 

earnings , 

Loss  of  corporate  income  taxes  from  increased 

costs  and  non-viable  projects. 

Federal  administrative  costs  for  both 

administering  the  implementation  and 

collection  of  the  tax. 


4.   Ngq»tiv?  Tappet  Likgly 

As  shown  in  the  April  30,  1993  study  by  Coopers  & 
Lybrand  and  Morrison  &  Foerster,  entitled  "A  Comparative 
Analysis  of  Mining  Fees  and  Royalties"  {the  "1993  Study") ,  a 
poorly  designed  federal  royalty,  and  presumably  a  federal 
severance  tax,  can  have  dramatic  negative  effects  on  the 
federal  treasury.   As  shown  in  the  1993  Study,  the  8% 
royalty  on  gross  proceeds  plus  the  holding  fees  proposed  in 
the  1993  Bumpers  Bill  would  likely  result  in  a  $443  million 
net  loss  to  the  federal  treasury.   The  8%  royalty  plus  the 
holding  fees  proposed  in  the  1993  Rahall  Bill  would  result 
in  a  $422  million  net  loss  to  the  federal  treasury.   (See 
Table  2  of  the  1993  Study) .   In  performing  a  sensitivity 
analysis  on  the  1993  Bumpers  and  Rahall  Bill  royalties, 
assuming  the  holding  fee  remains  the  same,  the  study  team 
concluded  that  if  the  Bumpers  and  Rahall  royalties  were 
12.5%,  the  net  loss  to  the  federal  treasury  would  be  $527 
million  under  the  Bumpers  Bill  and  $472  million  under  the 
Rahall  Bill.   (See  Table  2  of  the  1993  Study).   The  1993 
Craig  Bill  proposed  a  2%  royalty  on  net  income  at  the  mouth 
of  the  mine.   Our  study  showed  that  at  a  12.5%  rate,  the 
Craig  royalty  plus  holding  fees  would  net  the  federal 
treasury  only  $22  million. 

Although  the  severance  tax  proposal  is  far  too 
vague  to  afford  any  guidance  on  the  question  of  net  treasury 
impacts,  a  comparison  of  the  net  treasury  impacts  of  the 
1993  Bumpers  and  Rahall  Bill  royalties  and  the  1993  Craig 
Bill  royalty  should  be  instructive.   A  federal  severance  tax 
in  the  form  of  Nevada's  net  proceeds  tax  is  likely  to  net 


1274 


the  treasury  more  than  a  severance  tax  on  gross  proceeds  or 
gross  income;  however,  either  form  of  severance  teuc  is 
likely  to  have  significant  negative  effects  on  the  mining 
industry. 

More  importantly,  our  1993  Study  only  analyzed  the 
impacts  of  a  gross  and  net  royalty  on  public  lands  in  12 
western  states.   A  federal  severance  tax  on  all  lands, 
public  and  private,  and  on  minerals  found  in  all  states 
would  be  likely  to  have  a  more  draunatically  negative  net 
treasury  impact.   A  severance  tax  applicable  to  public  lands 
only  may  insulate  all  but  the  western  states  from  direct 
negative  consequences  of  mine  closures.   A  severance  tax 
applicable  to  all  lands,  however,  would  affect  every  state 
with  an  active  mine.   Job  losses  and  mine  closures  in  every 
state  may  well  have  an  even  more  dramatic  negative  net 
treasury  impact  than  shown  in  our  1993  Study. 


1275 
Mr.  Payne.  Mr.  Kelly. 

STATEMENT  OF  JOHN  L.  KELLY,  VICE  PRESffiENT,  PUBLIC 
AFFAIRS,  CLEVELAND  CLIFFS,  INC.,  ON  BEHALF  OF  THE 
AMERICAN  IRON  ORE  ASSOCIATION 

Mr.  Kelly.  Mr.  Chairman  and  distinguished  members  of  the 
subcommittee,  I  appreciate  the  opportunity  to  appear  before  you.  I 
am  John  Kelly.  I  am  vice  president  of  public  affairs,  Cleveland- 
CliflFs,  Inc.  I  am  also  a  former  tax  committee  chairman  of  American 
Iron  Ore  Association  headquartered  in  Cleveland,  which  I  rep- 
resent here  today.  The  association  is  a  trade  organization  rep- 
resenting companies  that  mine  approximately  70  percent  of  the 
iron  ore  that  is  produced  in  the  United  States  and  Canada, 

I  am  here  to  convey  to  you  in  the  strongest  terms  possible  that 
iron  ore  producers  are  deeply  troubled  that  a  mineral  severance  tax 
has  been  proposed  and  moreover,  upset  that  it  would  apply  to  iron 
ore  mining.  We  fail  to  see  the  rationale  or  need  for  such  a  tax  and 
we  cannot  afford  this  new  tax  burden  at  any  percentage  level. 

My  remaining  testimony  will  focus  on  our  industry  profile  in  the 
hope  that  your  understanding  of  our  contribution  to  society  and  our 
economic  challenges  will  be  enhanced. 

Essentially  there  are  no  remaining  iron  ore  reserves  of  commer- 
cial grade  in  the  United  States,  but  huge  quantities  of  low  grade 
material  exist  in  northern  Michigan  and  Minnesota.  Presently 
there  are  nine  iron  ore  mining  operations  in  these  two  areas  that 
are  efficiently  producing  more  than  50  million  annual  tons  of  high 
quality  iron  ore  pellets  from  low  grade  deposits. 

These  operations  and  the  related  infrastructure  represent  several 
billion  dollars  of  fixed  investment.  Steel  mills  are  the  only  consum- 
ers of  iron  ore  pellets  and  the  iron  ore  industry  is  indispensable  to 
the  survival  of  our  basic  steel  industry. 

The  iron  content  of  low  grade  ore  is  36  percent  or  less.  These  de- 
posits are  not  suitable  for  any  commercial  use.  Pellets,  on  the  other 
hand,  contain  approximately  65  percent  iron.  To  the  extent  thev  re- 
main competitive  in  cost,  they  are  a  desirable  raw  material  for 
making  iron  and  steel  products  because  they  consistently  meet  de- 
manding physical  and  chemical  specifications.  Due  to  transpor- 
tation limitations  and  other  reasons,  our  pellets  generally  do  not 
enter  markets  outside  the  Great  Lakes  steel-producing  regions  of 
the  United  States  and  Canada. 

Global  conditions  in  the  iron  ore  and  steel  industries  over  the 
past  decade  have  kept  downward  pressure  on  prices  and  have  ne- 
cessitated intense  efforts  to  increase  quality  and  decrease  costs. 
Yet,  iron  ore  is  being  sold  below  cost  on  a  spot  market  basis;  and 
integrated  steel  producers  continue  to  report  losses  and  weak  earn- 
ings. Under  these  conditions,  a  severance  tax  on  U.S.  iron  ore  min- 
ing operations  cannot  be  passed  on  to  consumers  and  it  cannot  be 
absorbed  by  producers  without  substantial  negative  implications. 

The  northern  regions  of  Michigan  and  Minnesota  are  as  sparsely 
settled  and  are  noted  for  persistently  high  unemployment.  Iron  ore 
mining  represents  the  predominant  source  of  employment  for  a 
highly  skilled  and  highly  paid  work  force;  and  it  generates  consid- 
erable satellite  employment.  Negative  consequences  to  iron  ore  pel- 
let producers,  brought  about  by  a  severance  tax,  can  also  be  ex- 


1276 

pected  to  have  serious  implications  for  surrounding  communities  in 
these  two  States. 

Mining  is  uniquely  risky  business;  yet  over  the  past  two  decades, 
we  have  invested  billions  of  dollars  in  state-of-the-art  pelletizing 
plants  and  related  facilities.  These  investments  were  made  with 
the  expectation  that  a  reliable  and  stable  U.S.  tax  system  would 
continue  to  provide  essential  incentives  to  help  bring  an  adequate 
return  on  these  long-term  investments. 

Our  expectations  were  strengthened  by  enactment  of  the  Min- 
erals Policy  Acts  of  1970  and  1980,  both  of  which  support  minerals 
development  and  enhanced  minerals  availability  as  a  matter  of  na- 
tional policy.  Yet  our  tax  system  has  worsened  over  the  past  decade 
as  it  pertains  to  basic  industry,  and  costs  of  new  Government  man- 
dates have  not  helped  the  situation. 

To  now  be  confronted  with  another  proposed  tax  system  change 
in  the  form  of  a  national  severance  tax,  which  is  in  conflict  with 
national  minerals  policy,  is  beyond  our  ability  to  understand  or  rec- 
oncile. 

It  is  necessary  to  provide  tax  incentives  to  invest  in  domestic 
basic  industries  that  continue  to  be  ravaged  by  economic  depression 
and  threatened  by  foreign  dumping  and  subsidies. 

The  domestic  iron  ore  mining  and  steel  industries  compete  with 
foreign  suppliers  that  benefit  from  border  taxes  on  imported  prod- 
ucts and  tax  credits  on  their  own  exports.  Domestic  prices  of  iron 
ore  mining  and  steel  have  languished  for  more  than  a  decade  and 
higher  costs  cannot  be  absorbed. 

While  this  is  not  the  forum  in  which  to  discuss  wholesale  alter- 
ation of  the  U.S.  tax  system,  you  should  know  that  both  of  these 
industries  have  advocated  prompt  consideration  and  adoption  of  an 
equitable  GATT-legal  and  border-adjustable  tax  on  U.S.  business 
activities  as  a  substitute  for  the  present  tax  on  business  income. 

We  ask  you  to  reject  the  mineral  severance  tax  proposal  so  as  not 
to  exacerbate  the  major  shortcomings  of  our  Nation's  existing  busi- 
ness tax  system.  In  doing  so,  you  will  also  assist  the  President  in 
his  renewed  effort  to  stimulate  the  economy. 

Thank  you  for  your  attention. 

Mr.  Payne.  Thank  you  very  much. 

[The  prepared  statement  follows:] 


1277 


STATEMENT 

Of 

AMERICAN  IRON  ORE  ASSOCIATION 

before  the 

SUBCOMMITTEE  ON  SELECT  REVENUE  MEASURES 

COMMITTEE  ON  WAYS  AND  MEANS 


September  8,  1993 


PROPOSAL  TO  IMPOSE  A  SEVERANCE 
TAX  ON  HARD  ROCK  MINERALS 


Mr.  Chairman  and  other  distinguished  members  of  this 
Subcommittee,  I  appreciate  this  opportunity  to  appear  before  you. 
My  name  is  John  Kelley,  Vice  President-Public  Affairs,  Cleveland- 
Cliffs  Inc.  I  am  also  former  Tax  Committee  Chairman  of  American 
Iron  Ore  Association,  headquartered  in  Cleveland,  Ohio,  which  I  am 
representing  here  today.  The  Association  is  a  trade  organization 
representing  companies  that  mine  approximately  70%  of  the  iron  ore 
that  is  produced  in  the  United  States  and  Canada. 

My  purpose  in  requesting  to  be  heard  is  to  convey  to  you  in 
the  strongest  terms  possible  that  iron  ore  producers  are  deeply 
troubled  that  a  minerals  severance  tax  has  been  proposed  and, 
moreover,  upset  that  it  would  apply  to  iron  ore  mining.  We  fail  to 
see  the  rationale  or  need  for  such  a  tax;  and  we  cannot  afford  this 
new  tax  burden  at  any  percentage  level. 

Because  the  severance  tax  concept  is  not  complicated  and  our 
resistance  is  grounded  in  the  need  for  a  strong  and  world 
competitive  domestic  iron  ore  mining  industry,  my  remaining 
testimony  will  focus  on  our  industry  profile  in  the  hope  that  your 
understanding  of  our  contribution  to  society  and  our  economic 
challenges  will  be  enhanced. 

Essentially,  there  are  no  remaining  iron  ore  reserves  of 
commercial  grade  in  the  United  States,  but  huge  quantities  of  low 
grade  material  exist  in  northern  Michigan  and  Minnesota. 
Presently,  there  are  nine  iron  ore  mining  operations  in  these  two 
areas  that  are  efficiently  producing  more  than  50  million  armual 
tons  of  high  quality  iron  ore  pellets  from  low  grade  deposits. 
These  operations  and  related  infrastructure  represent  several 
billion  dollars  of  fixed  investment.  Steel  mills  are  the  only 
consumers  of  iron  ore  pellets,  and  the  iron  ore  industry  is 
indispensable  to  the  survival  of  the  basic  steel  industry. 

The  iron  content  of  low  grade  ore  ranges  from  less  than  30%  to 
approximately  36%.  These  deposits  are  not  suitable  for  steel 
industry  consumption  or  any  other  use.  Pellets,  on  the  other  hand, 
contain  approximately  65%  iron.  The  transformation  of  low  grade 
iron  ore  into  pellets  is  a  very  expensive  process  in  the  United 
States  because  of  high  energy,  labor  and  environmental  costs.  To 
the  extent  they  remain  competitive  in  cost,  they  are  a  desirable 
raw  material  for  making  iron  and  steel  products  because  they 
consistently  meet  demanding  physical  and  chemical  specifications. 
Due  to  transportation  limitations  and  various  other  reasons, 
however,  these  domestically  produced  pellets  generally  do  not  enter 
markets  outside  the  Great  Lakes  steel  producing  regions  of  the 
United  States  and  Canada,  except  for  minor  movements  to  steel 
producers  in  such  areas  as  Utah  and  Alabama.  In  contrast,  foreign 
competition  does  exist  for  the  U.S.  market,  notably  from  Brazil 
which  mines  a  very  high  grade  ore  requiring  no  expensive 
processing. 


TT  i'in  r\  —  QA 


1278 


Global  conditions  in  the  iron  ore  and  steel  industries  over 
the  past  decade  have  kept  downward  pressure  on  prices  and  have 
necessitated  intense  efforts  to  increase  quality  and  decrease 
costs.  Yet,  iron  ore  is  being  sold  below  cost  on  a  spot  market 
basis;  and  integrated  steel  producers  continue  to  report  losses  and 
weak  earnings.  Under  these  conditions,  a  severance  tax  on  U.S. 
iron  ore  mining  operations  cannot  be  passed  on  to  consumers;  and  it 
cannot  be  absorbed  by  producers  without  substantial  negative 
consequences. 

The  northern  regions  of  Michigan  and  Minnesota  are  sparsely 
settled  and  are  noted  for  persistently  high  unemployment.  Iron  ore 
mining,  which  has  been  forced  to  rationalize  its  operations 
considerably  in  recent  years,  represents  the  predominant  source  of 
employment  for  a  highly  skilled  and  highly  paid  work  force;  and  it 
generates  considerable  satellite  employment.  Negative  consequences 
to  iron  ore  pellet  producers,  brought  about  by  the  imposition  of  a 
severance  tax,  can  also  be  expected  to  have  serious  implications 
for  surrounding  communities  in  these  two  states,  because  of  reduced 
production  and  the  probability  that  some  operations  would  have  to 
close. 

It  is  generally  recognized  that  mining  is  an  extremely  risky 
business.  Yet,  over  the  past  two  decades  we  have  invested  billions 
of  dollars  in  state-of-the-art  pelletizing  plants,  related 
facilities,  modem  self -unloading  lake  vessels,  and  other 
infrastructure,  primarily  for  domestic  trade.  These  investments 
were  made  with  the  expectation  that  a  reliable  and  stzJsle  U.S.  tax 
system  would  continue  to  provide  essential  incentives  to  help  bring 
an  adequate  return  on  these  long-term  fixed  investments. 
Understandably,  our  expectations  were  strengthened  by  enactment  of 
the  Mining  and  Minerals  Policy  Act  of  1970  and  the  Materials  and 
Minerals  Policy  Act  of  1980,  both  of  which  are  in  support  of 
minerals  development  and  enhanced  minerals  availability  as  a  matter 
of  national  policy.  Yet,  our  tax  system  has  worsened  over  the  past 
decade  as  it  pertains  to  basic  industry,  and  costs  of  new 
government  mandates  have  not  helped  the  situation.  To  now  be 
confronted  with  another  proposed  tax  system  change  in  the  form  of 
a  national  severance  tax,  which  could  bring  eibout  results  that  are 
directly  in  conflict  with  existing  minerals  policy  as  enacted  by 
Congress,  is  beyond  our  ability  to  understand  or  reconcile. 

The  bottom  line  is,  our  industry  experienced  an  abrupt  and 
severe  business  contraction  over  the  past  decade,  and  our  present 
economic  condition  remains  bleak.  This  is  greatly  due  to  unfair 
trade  practices  by  offshore  competitors  and  competition  generally 
on  a  global  scale. 

To  carry  out  our  existing  national  policy,  it  is  urgently 
necessary  to  provide  through  our  tax  system  incentives  to  invest  in 
domestic  industries  that  continue  to  be  ravaged  by  economic 
depression  and  threatened  by  foreign  dumping  and  subsidies.  The 
question  today  is  not  growth  or  expansion;  it  is  tax  stability  and 
incentives  for  survival  of  vital  basic  industries  in  this  country. 

The  domestic  iron  ore  mining  and  steel  industries  compete 
directly  in  domestic  markets  and  elsewhere  with  foreign  suppliers 
that  benefit  from  border  taxes  on  imported  products  and  tax  credits 
on  their  own  exports.  Domestic  prices  of  iron  ore  and  steel  have 
languished  for  more  than  a  decade,  and  higher  tax  costs  cannot  be 
absorbed.  We  recognize  that  this  is  not  the  forum  in  which  to 
discuss  wholesale  alteration  of  the  U.S.  tax  system,  but  we  believe 
you  should  know  that  both  of  these  industries  have  advocated  prompt 
consideration  and  adoption  of  an  equitable,  GATT-legal,  and  border- 
adjustable  tax  on  U.S.  business  activities,  as  a  substitute  for  the 
present  tax  on  business  income. 

The  request  we  present  to  you  today  is  to  reject  the  minerals 
severance  tax  proposal,  so  as  not  to  exacerbate  the  major 
shortcomings  of  our  nations 's  existing  business  tax  system. 


1279 

Mr.  Payne.  We  have  been  called  to  vote  so  the  committee  will  be 
in  recess  until  2:30. 

[Brief  recess.] 

Mr.  Payne.  The  committee  will  come  to  order. 

We  had  concluded  with  the  testimony  of  our  fifth  panel  and  were 
preparing  to  ask  questions  of  the  witnesses. 

Mr.  Hancock  will  inquire. 

Mr.  Hancock.  Thank  you,  Mr.  Chairman.  I  have  several  ques- 
tions I  would  like  to  ask  just  generally. 

Is  there  a  specific  proposed  tax  on  mining?  If  there  is,  I  haven't 
seen  it.  Is  it  in  writing  any  place? 

Mr.  Alfers.  I  haven't  seen  one  either,  Mr.  Hancock. 

Mr.  Hancock.  It  will  be  difficult  to  evaluate  it  until  we  see  what 
it  is. 

Mr.  Alfers.  It  makes  it  difficult  to  speculate  what  the  revenue 
or  economic  impact  might  be.  It  is  terribly  important  to  nail  down 
what  this  proposal  is  to  give  it  any  kind  of  consideration. 

Mr.  Hancock.  We  are  talking  about  a  tax;  I  understand  that.  It 
seems  like  that  is  what  we  talk  about  here  most  of  the  time.  We 
don't  know  how  it  would  be  applied.  We  don't  know  for  sure  what 
would  be  subject  to  the  tax.  We  don't  know  how  it  would  be  col- 
lected. 

Mr.  Chairman,  we  might  be  premature  in  holding  a  hearing  on 
something  we  haven't  seen.  Has  there  been  a  tax  revenue  estimate 
prepared  and  if  so 

Mr.  Alfers.  I  have  seen  none. 

Mr.  Kelly.  I  don't  think  there  has.  I  would  think  it  would  be  ex- 
tremely difficult  for  anyone  to  make  a  reliable  estimate. 

Mr.  Hancock.  OK  I  understand  that  prices  of  metals  and  mate- 
rials are  determined  on  the  world  market.  It  seems  we  think  they 
aren't  at  times. 

Wouldn't  any  tvpe  of  a  tax  on  minerals  put  us  at  an  international 
competitive  disadvantage,  right  now  especially? 

Mr.  Alfers.  I  think  any  tax  becomes  a  cost  in  the  final  analysis 
and  some  taxes  become  a  bigger  cost  than  others.  A  tax  on  the 
gross  value  of  minerals,  for  example,  can  swallow  the  entire  mar- 
gin. Consider  the  idealized  example  of  the  production  of  an  ounce 
of  gold.  In  North  America,  the  average  cost  of  production  per  ounce 
of  gold  is  about  $330.  If  the  price  of  gold  is  $360,  we  are  looking 
at  a  $30  margin. 

If  one  calculates  the  tax  or  even  a  royalty  on  the  gross  value  of 
that  product,  it  more  than  swallows  all  the  margins,  about  140  per- 
cent of  the  operating  margin.  Something  like  that  is  obviously  un- 
tenable. The  reason  for  that  is  that  the  economics  of  mining,  the 
margins  are  very,  very  thin.  Often  a  mine  will  try  to  operate  some- 
times at  a  loss  for  awhile,  but  on  a  margin  of  80  or  90  percent.  So 
taxes  of  the  magnitude  that  we  are  looking  at  here  are  wholly  inap- 
propriate to  an  industry  like  this. 

Mr.  Hancock.  Well,  do  you  have  any  idea  of  what  the  total  num- 
ber is  of  how  many  different  companies  do  mining  and  oil  explo- 
ration? 

Mr.  Alfers.  In  mining,  there  must  be  several  thousand  compa- 
nies that  are  engaged  at  some  level  in  the  exploration  or 
prospecting,  development  of  mining. 


1280 


Mr  Hancock.  Do  you  have  any  idea  of  the  number  of  people  en- 
^^?f    ^A         mining  industry,  the  amount  of  employment"^ 

Mr  Alfers.  I  would  like  to  provide  you  a  memorandum  that 
would  lav  out  the  distribution  of  those  jobs.  I  don't  have  that  on 
the  tip  of  my  tongue. 

[The  information  follows:] 


1281 


SAN  FRANCISCO 
LOS  ANGELES 
SACRAMENTO 
ORANGE  COUNTY 
PALO  ALTO 
WALNUT  CREEK 
SEATTLE 


Morrison  &  Foerster 

ATTORNEYS  AT  LAW 

5200  REPUBLIC  PLAZA 

370  17TH  STREET 

DENVER,  COLORADO  80202-5638 

TELEPHONE  (303)  592-1500 

TELEFACSIMILE  (303)592-1510 


NEW  YORK 
WASHINGTON,  DC. 
LONDON 
BRUSSELS 
HONG  KONG 
TOKYO 


DIRECr  DL\L  NUMBER 


April    14,     1994 
VIA    FACSIMILE 


(303)  592-2265 


The  Honorable  Mel  Hancock 
Committee  on  Ways  and  Means 
U.S.  House  of  Representatives 
1102  Longworth  HOB 
Washington,  DC   20515-6348 

Re :   Employment  in  the  Mining  Industry 

Dear  Representative  Hancock: 

On  September  8,  1993,  I  testified  on  behalf  of  the 
Mineral  Resources  Alliance  at  hearings  held  by  the 
Subcommittee  on  Select  Revenue  Measures  of  the  House  Ways 
and  Means  Committee.   The  subject  of  those  hearings  was 
miscellaneous  revenue  measures,  among  which  was  a  proposed 
excise  tax  on  the  extraction  of  hard  rock  minerals.   At  the 
hearing,  you  asked  for  information  on  the  number  of  mining 
entities,  including  the  oil  and  gas  industry,  in  the  United 
States.   You  also  inquired  as  to  the  number  of  people 
employed  by  the  mining  industry. 

The  most  current  complete  set  of  government  figures 
on  employment  in  the  mining  industry  and  the  number  of 
enterprises  involved  in  the  mining  industry  come  from  1987.1 
The  total  number  of  entities  engaged  in  mining  activities 
("Establishments")  in  1987  was  33,617.   Broken  down,  that 
number  included  1,027  establishments  in  the  metal  mining 
industry;  5,775  establishments  in  the  nonmetallic  mining 


1    The  remainder  of  the  information  in  this  and  the 
following  paragraphs  comes  from  the  charts  attached  hereto 
as  Exhibits  A  and  B,  reprinted  from  the  U.S.  Department  of 
Commerce,  Bureau  of  the  Census,  Statistical  Abstract  of  the 
United  States  1993,  694  (1993)  (Exhibit  A),  and  the  U.S. 
Department  of  Labor,  Bureau  of  Labor  Statistics,  Employment 
and  Earnings  86  (January  1994)  (Exhibit  B) . 


1282 


industry;  3,905  establishments  in  the  coal  mining  industry; 
and  22,910  establishments  in  the  oil  and  gas  extraction 
industry. 

In  terms  of  employment,  in  1987  there  were  698,000 
people  directly  employed  by  the  mining  industry.   Of  those, 
the  metal  mining  industry  employed  44,000;  nonmetallic 
mining  employed  113,000;  the  coal  industry  employed  163,000; 
and  the  oil  and  gas  extraction  industry  employed  378,000. 
For  November  of  1993,  that  overall  employment  figure  dropped 
from  698,000  to  598,000.   In  November  of  1993,  the  metal 
mining  industry  employed  50,600  people;  nonmetallic  mining 
employed  101,400;  the  coal  industry  employed  94,600;  and  the 
oil  and  gas  extraction  industry  employed  351,200. 

During  the  six-year  period,  only  the  metal  mining 
industry  saw  an  increase  in  employment .   The  metal  mining 
industry,  which  includes  gold,  silver,  copper,  lead  and 
zinc,  is  the  industry  that  mines  most  of  the  minerals  that 
are  subject  to  appropriation  under  the  1872  Mining  Law  and 
which  would,  in  turn,  be  subject  to  the  proposed  excise  tax. 
In  addition,  some  of  the  minerals  included  in  the 
nonmetallic  minerals  category  are  subject  to  the  1872  Mining 
Law  and  would  be  subject  to  the  proposed  excise  tax  as  well. 

It  is  also  important  to  bear  in  mind  that  the 
mining  industry  is  extraordinarily  productive  in  creating 
indirect  jobs.   The  mining  industry  creates  service  and 
support  jobs  that  are  not  reflected  in  the  employment 
figures  reported  above.   Economists  often  use  the  Regional 
Input-Output  Modeling  System  ("RIMS")  developed  by  the 
Bureau  of  Economic  Analysis  to  determine  the  indirect  jobs 
created  by  a  particular  industry  in  a  particular  state.   For 
the  mining  industry  in  the  12  western  states  (where  the  vast 
majority  of  metal  mining  occurs) ,  that  multiplier  averages 
19.3073  (in  other  words,  a  total  of  19  jobs  are  created  for 
every  $1,000,000  of  output  from  the  mining  industry).   It  is 
both  the  direct  and  indirect  jobs  that  would  be  impacted  by 
the  imposition  of  an  excise  tax. 

By  way  of  illustration,  in  1993,  we,  along  with 
Coopers  &  Lybrand,  conducted  a  study  on  the  financial  and 
economic  impacts  of  various  royalty  proposals  on  the  hard 
rock  mining  industry. 2  The  results  of  that  study  highlight 


2    Alfers  &  Graff,  A  Comparative  Analysis  of  Mining  Fees 
and  Royalties  (1993) . 


1283 


both  this  job-creating  aspect  of  the  mining  industry  and, 
conversely,  the  job  loss  threatened  by  the  new  fees, 
royalties,  and  taxes  recently  imposed  on  or  now  proposed  for 
the  mining  industry.   Our  study  indicated  that  the  hard  rock 
mining  industry  would  employ  47,000  fewer  people  over  the 
long  term  as  a  result  of  the  imposition  of  an  8%  gross 
royalty  on  production.   It  is  the  possibility  of  impacts  of 
that  magnitude  that  demands  a  thorough  economic  analysis  of 
proposals  like  the  one  for  a  12%  excise  tax  that  was  the 
subject  of  the  hearing. 

If  we  can  be  of  any  assistance  to  the  Subcommittee 
in  performing  such  an  economic  analysis,  please  contact  me. 
Thank  you  again  for  the  opportunity  to  testify  before  the 
Subcommittee . 


Very  truly  yours, 


SDA :  j  e 
Enclosures 


1284 


EXHIBIT    A 

Mineral  Industries 


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1285 


EXHIBIT    B 


ESTABUSHMENT  DATA 

EMPLOYMENT 

NOT  SEASONALLY  ADJUSTED 

B-2.  EmptoyM*  on  norrtarm  payroll*  by  dotailed  Industry 


Pixxluetlon  wof1<ef»' 


343^ 

172.5 
165.2 


524.8 
26.5 
518.1 


1,101.8 
539.2 
27.3 
535.3 


351.2 
163.9 
181.9 


.09i0 
538.3 
27.3 


2,675.6 
604.9 
151.5 
502.0 


^»e4.6 

637.8 
166.2 
524.1 
443.5 
18Z0 
220.6 


676.9 
76.8 
176.6 
141.2 


22J 
27.3 
42.6 
59.5 
43.3 
80.8 

479.8 
27Z4 
121.8 
67.5 
20.6 
28.3 


249.6 
103.2 
69.2 
2Z9 


504.C 

2,934.9 
630.5 
178.3 
525.2 
434.2 
180.9 
218.1 


176.4 
140.5 
33.8 
249.5 
103.6 


3,523 
759.1 


2,142.1  : 
443.0 
1316 
387.8 


559.9 
64.6 
153.1 
122.2 
29.2 


731.3 
344.4 

iai 

374.8 


23Z0 
80.3 
147.5 


^360.6 
470.6 
157.7 
407.3 
382.2 
137.4 
179.2 


65.6 
153.7 
122.6 


229.6 
105.2 
73.8 


462.3 

149.3 
408.0 
372.4 


573.5 
63.5 

153.1 

121.9 
29.5 

200.3 
80.8 
55.6 


385.3 
230.6 
105.8 


SeefoOnotm 


1286 

Mr.  Hancock.  Would  you  say  the  severance  tax  would  force  some 
mines  to  close  or  do  you  think  that  the  marketplace  would  be  able 
to  absorb  the  severance  tax  they  are  talking  about? 

Mr,  Alfers.  Some  mines  would  close  and  others  would  change 
their  shape  in  a  way  that  would  be  similar  to  closing.  What  we 
have  not  done  though  is  looked  at  the  economics  of  a  tax  proposal, 
because  we  haven't  seen  that.  We  have,  however,  in  the  context  of 
the  reform  looked  pretty  hard  at  the  economics  of  mining  projects 
in  the  United  States,  and  we  have  looked  at  royalties  in  that  con- 
text. We  are  able  to  on  a  project-by-project  basis  look  at  the  way 
royalty  schemes  affect  the  operations,  and  some  mines  close. 

It  is  important  here  because  mining  is  one  of  those  industries 
where  there  is  a  tremendous  capital  investment  to  build  a  mine. 
Costs  can  be  sunk.  So  to  just  think  about  the  closure  of  a  mine  in 
the  short  run  grossly  understates  the  economic  impact. 

It  is  the  mines  over  a  longer  term,  those  mines  that  are  on  the 
table  if  you  will,  those  in  the  midst  of  feasibility  that  are  approach- 
ing a  construction  decision  where  the  capital  is  not  sunk,  those  will 
stop,  and  in  our  economic  analysis  that  is  where  we  saw  the  big 
jobs  impact. 

Mr.  Hancock.  On  August  6,  I  think  it  was,  we  passed  a  major 
tax  increase.  I  am  sure  you  are  associated  with  small  business  com- 
panies. What  kind  of  feedback  are  you  getting  from  them  now 
about  these  changes?  Are  you  getting  the  same  feedback  from  your 
members  as  I  am  getting  in  my  district  about  the  new  tax  law? 

Mr.  Campbell.  I  can't  comment  for  small  business,  but  as  a  large 
corporation,  our  tax  rate  has  gone  up  and  certainly  the  overall  fact, 
both  from  a  corporate  standpoint  as  well  as  personal,  there  is  a  tre- 
mendous outcry  at  least  to  the  people  I  am  in  contact  with  as  far 
as  the  new  tax  law  is  concerned. 

Mr.  Hancock.  But  you  do  business  with  a  lot  of  small  business 
people? 

Mr.  Campbell.  Absolutely,  yes. 

Mr.  Hancock.  What  are  those  people  telling  you? 

Mr.  Campbell.  Congressman,  I  haven't  found  any  support.  No- 
body is  pleased  with  it. 

Mr.  Hancock.  Thank  you  very  much. 

Mr.  Payne.  Mr.  Hoagland. 

Mr.  Hoagland.  No  questions. 

Mr.  Payne.  Mr.  McCrery. 

Mr.  McCrery.  Thank  you,  Mr.  Chairman. 

Mr.  Damron,  is  your  major  objection  to  an  import  fee  that  U.S. 
manufacturers  would  be  at  a  disadvantage  in  terms  of  energy 
costs?  Is  that  your  basic  objection? 

Mr.  Damron.  That  is  basically  it,  competitiveness  worldwide. 

Mr.  McCrery.  That  is  a  legitimate  point. 

Mr.  Campbell  and  Ms.  Lazenby,  how  do  you  answer  that  objec- 
tion? 

Ms.  Lazenby.  If  you  look  at  Japan  they  have  an  85  percent  cus- 
tom fee  for  imported  oil.  We  are  not  asking  for  a  very  large 
amount.  EC  imposes  a  customs  fee  so  I  don't  think  the  amount  is 
such  that  it  would  make  the  chemicals  noncompetitive.  We  are  ask- 
ing for  something  that  protects  American  jobs.  We  are  getting 


1287 

$14.50  for  our  oil  that  we  sell  and  it  costs  $12  a  barrel  to  operate 
that  oil.  We  have  to  pay  royalty. 

So  right  now,  we  are  losing  almost  $2  a  barrel  on  the  oil  that 
we  produce.  We  can't  survive,  and  you  are  going  to  lose  12  million 
barrels  of  oil,  certainly  at  least  a  million,  and  that  is  $7  bilHon 
more.  Surely  we  can  come  up  with  something  that  will  protect 
100,000  jobs. 

Mr.  McCrery.  Mr.  Campbell. 

Mr.  Campbell.  Congressman,  I  think  there  are  a  couple  of  over- 
riding issues.  First,  it  really  is  in  the  best  interest  of  this  country, 
I  think,  to  have  a  strong  exploration  and  production  industry  and 
refining  and  marketing  industry.  I  reallv  believe  that.  Second, 
there  is  a  difference  between  the  crude  oil  import  fee  and  the  re- 
fined product  fee  that  I  was  talking  about. 

In  the  case  of  the  crude  oil  fee,  the  world  is  awash  in  crude  oil. 
It  is  today  and  if  you  look  at  conservation,  alternative  fuels,  refor- 
mulated gasoline  and  oxygenates,  the  world  will  be  awash  in  crude 
oil  for  a  long  time. 

Any  import  fee  that  you  put  on  crude  oil  increases  the  cost  of  en- 
ergy in  this  country.  We  can  talk  about  the  amount,  but  that  is  the 
impact.  In  the  case  of  the  refined  product  fee,  there  is  a  big  dif- 
ference. When  the  Congress  passed  the  regulatory  laws  that  we  are 
living  with  today,  you  already  raised  the  cost  to  manufacture  a 
product  in  this  country. 

You  have  created  that  high  cost  product  island  versus  the  rest 
of  the  world.  We  are  talking  about  the  ability  of  foreign  manufac- 
turers to  undercut  that  because  they  aren't  playing  by  the  same 
rules.  So  the  higher  cost  product  has  already  been  created  by  the 
regulations  and  laws  recently  passed. 

Mr.  McCrery.  I  don't  disagree  with  that,  but  that  is  not  nec- 
essarily a  reason  to  exacerbate  the  problem.  I  mean,  I  share  Mr. 
Damron's  concern  and  I  am  from  Louisiana,  so  I  certainly  share 
the  concern  of  the  independent  producers. 

We  have  already  lost  somewhere  between  450,000  and  600,000 
jobs  depending  on  whose  estimates  you  believe,  so  another  100,000 
may  not  seem  too  critical.  But  certainly  those  of  us  in  the  energy 
producing  states  would  like  to  preserve  what  we  have  left  and  even 
create  more.  The  way  to  do  that  obviously  is  to  get  the  price  up. 

So  I  am  kind  of  stuck  between  the  concerns  of  our  manufacturing 
sector  and  the  concerns  of  the  producing  sector.  What  about  an  im- 
port fee  tied  to  a  peg  price,  put  on  a  sliding  scale,  so  that  if  the 
world  price  drops  below  the  peg  price,  the  import  fee  would  kick 
in?  Let's  say  we  establish  a  peg  price  of  $21  a  barrel.  If  the  world 
price  is  $17,  there  is  a  $4  import  fee.  Have  you  considered  that? 

It  seems  to  me  that  may  encourage  OPEC  and  other  producers 
to  limit  their  production  to  meet  our  peg  price,  giving  some  added 
incentive  to  get  the  price  up  to  our  peg  price.  What  do  you  think 
about  that? 

Mr.  Damron.  a  floor  price  still  gives  you  an  oil  import  fee  if  the 
world  oil  price  is  below  the  floor  price.  So  that  still  means  that  the 
chemical  industry  is  less  competitive  in  world  markets  under  that 
circumstance. 

Mr.  McCrery.  That  is  true.  If  the  world  price  were  below  the  peg 
price  and  we  had  an  import  fee,  you  are  right;  it  would  increase 


1288 

your  cost  vis-a-vis  your  competitors.  But  if  that  peg  price  gave  the 
rest  of  the  world's  producers  the  incentive  to  cut  production  to  meet 
our  peg  price,  then  you  wouldn't  be  at  a  disadvantage. 

Ms.  Lazenby.  My  comment  is  that  the  independent  producers 
would  welcome  such  an  initiative.  But  I  understand  the  concerns 
that  the  chemical  industry  and  I  am  sure  the  refining  industry 
might  have.  I  would  like  to  say  that  as  independent  producers  and 
U.S.  independent  producers  and  business  people  we,  like  the  refin- 
ers and  the  chemical  people,  are  paying  a  very  high  environmental 
cost  which  we  are  happy  to  pay. 

We  are  responsible  operators,  and  we  would  like  to  work  together 
with  this  committee  and  our  sister  industries  to  try  to  come  up 
with  some  method  that  keeps  our  refining,  our  chemical  and  our 
production  business  alive.  We  may  have  differences  in  nuances,  but 
we  ought  to  be  able  to  sit  down  and  work  something  out  and  do 
it  now  because  the  time  is  fleeting. 

Mr.  Campbell.  If  I  could  make  one  point.  I  indicated  to  you  that 
the  laws  are  increasing  the  cost  in  this  country  so  there  is  no  need 
to  exacerbate  that.  We  are  not  in  a  equilibrium  state.  We  have  just 
begun  to  make  the  investments  as  far  as  the  Clean  Air  Act  and 
other  regfulations  are  concerned,  so  it  is  not  a  state  of  equilibrium. 

An  important  point  is  that  rather  than  make  these  investments, 
in  many  cases,  we  are  shutting  down  plants.  I  just  shut  down  the 
fuel  section  of  our  Tulsa  refinery.  We  laid  off  the  people  in  that  re- 
finery that  has  been  around  for  almost  100  years;  because  you  can't 
invest  $150  million  in  that  refinery.  As  we  continue  to  move  for- 
ward with  reformulated  gasoline  one  in  1995,  reformulated  two  in 
1998,  there  will  be  more  and  more  of  those  plants  shut  down. 

As  long  as  you  can  take  the  industry  and  go  offshore  and  produce 
the  product  and  pollute  there  and  bring  it  back  in  under  today's 
costs  in  this  country,  you  have  to  recognize  that  you  are  going  to 
shut  down  the  refining  industry  in  this  country.  I  do  consider  that 
a  national  security  issue,  and  I  will  tell  you  the  reason  why.  When 
we  are  talking  about  importing  crude  oil,  you  are  talking  probably 
between  12  and  15  countries  out  there  and  the  threat  has  always 
been  the  formation  of  a  cartel  and  consequently  their  dictating 
prices  to  you. 

In  the  case  of  product,  you  have  very  few  foreign  manufacturers 
overseas.  You  don't  have  12  to  15.  Consequently,  once  we  shut 
down  refineries,  there  is  no  starting  them  back  up  again.  If  you  ex- 
port that  business,  you  will  become  dependent  upon  relatively  few 
foreign  manufacturers  to  put  that  product  into  this  country. 

By  the  way,  if  you  recall,  I  was  only  talking  about  gasoline  and 
blending  components,  not  distillate  and  heating  oils,  and  petro- 
chemicals and  residuals,  et  cetera.  You  primarily  hear  about  gaso- 
line and  gasoline  blending  components  only.  You  say  don't  exacer- 
bate the  problem.  But  as  each  year  goes  forward,  it  will  get  much 
worse. 

Mr.  McCrery.  I  was  referring  to  other  manufacturing  sectors  of 
the  economy,  not  yours. 

Mr.  Damron. 

Mr.  Damron.  Congressman,  let  me  make  a  few  comments  here. 
We  are  in  support  of  the  refining  industry.  We  are  dependent  on 


1289 

the  refining  industry,  so  we  would  like  to  see  the  domestic  refining 
industry  do  well  because  they  supply  our  raw  materials. 

Two,  the  concern  about  environmental  regulation  they  have  also 
applies  to  other  people  that  have  to  comply  with  environmental 
regulations  also  and  compete  with  foreign  competitors  that  do  not 
have  to  comply  with  those  same  type  of  regulations. 

Three,  if  you  want  a  differential  between  the  crude  price  and  the 
refined  petroleum  products,  the  only  way  I  can  see  you  can  main- 
tain the  differential  is  put  some  kind  of  a  ceiling  on  crude  oil.  We 
are  not  proposing  a  ceiling,  but  it  seems  that  would  be  necessary 
in  order  to  maintain  a  differential. 

Mr.  McCrery.  Thank  you  very  much. 

Thank  you,  Mr.  Chairman  for  your  indulgence.  This  country 
faces  a  problem  with  respect  to  its  energy  needs  and  its  domestic 
energy  producing  and  manufacturing  sectors,  and  it  is  something 
this  committee  ought  to  be  concerned  about. 

Thank  you  all  for  your  testimony. 

Mr.  Payne.  Mr.  Camp. 

Mr.  Camp.  Thank  you,  Mr.  Chairman.  I  will  direct  my  questions 
to  Mr.  Alfers  or  Mr.  Kelly,  whoever  can  answer  them. 

Regarding  the  severance  tax  on  hard  rock  minerals,  what  would 
that  include  and  can  you  tell  me  what  "hard  rock  minerals"  means? 

Mr.  Kelly.  Let  me  say  that  I  was  very  surprised  when  the  an- 
nouncement came  out  about  the  proposal  for  the  severance  tax  and 
the  first  persons  that  I  called,  because  I  didn't  think  there  was  a 
Tax  Code  definition,  was  our  geologist  and  R&D  people,  and  they 
weren't  sure,  and  had  a,  apparently  a  glossary  of  terms  used  in  the 
mining  industry,  and  the  response  was  that  any  mineral  that  has 
to  be  blasted  as  a  part  of  its  mining  extraction  process  is  a  hard 
rock  mineral,  and  consequently  iron  ore  is  about  as  hard  a  rock 
substance  as  you  can  get. 

And  it  was  at  that  point  that  I  concluded  that  we  had  to  take 
this  matter  seriously.  In  trying  to  find  out  more  about  the  genesis 
of  this  proposal,  we  ran  into,  you  might  say,  a  blind  alley.  We  could 
not  trace  it  back,  and  even  today,  we  were  attempting  to  try  to  find 
out  if  iron  ore  was,  let's  say,  originally  intended  to  be  part  of  this 
severance  tax,  and  we  have  not  been  able  to  get  a  conclusive  an- 
swer as  of  this  moment. 

Mr.  Camp.  Mr.  Chairman,  do  we  have  before  the  committee  any 
revenue  estimates  for  this  particular  proposal,  any  background  on 
how  this  information  or  calculation  might  be  made? 

Mr.  Payne.  We  do  not  have  any  such  revenue  estimate. 

Mr.  Camp.  Do  we  know  if  there  are  any  studies  that  have  been 
submitted  to  the  committee  on  this  proposal? 

Mr.  Payne.  Not  at  this  time. 

Mr.  Camp.  Thank  you  very  much.  Just  as  an  aside,  Mr.  Camp- 
bell, your  company  used  to  have  a  regional  headquarters  in  my 
hometown  and  it  was  a  very  welcome  corporate  citizen.  I  think  one 
of  the  reasons  it  is  not  there  anymore  is  outlined  in  your  testimony. 
It  was  good  to  have  you  here  and  I  appreciate  your  comments. 

Mr.  Campbell.  Thank  you  very  much. 

Mr.  Payne.  I  have  a  couple  of  questions  just  to  further  my  under- 
standing concerning,  first,  the  import  fee.  Ms.  Lazenby,  you  said 
that  right  now  you  are  losing  $2  a  barrel  at  the  world  price  so  that 


1290 

means  there  are  people  in  the  world  who  are  able  to  produce  oil 
for  $2  a  barrel  less  than  our  domestic  manufacturers  or  domestic 
producers  are  producing  oil  and  are  still,  I  assume,  making  a  prof- 
it? 

Ms.  Lazenby.  That  is  correct. 

Mr.  Payne.  In  order  to  sell  at  today's  world  price? 

Ms.  Lazenby.  That  is  correct. 

Mr.  Payne.  Then  the  increased  tariff  being  discussed  here  is  15 
cents  per  barrel? 

Ms.  Lazenby.  No,  85  cents  per  barrel. 

Mr.  Payne.  So  that,  at  least  in  today's  market,  it  doesn't  equate 
to  the  differential 

Ms.  Lazenby.  It  doesn't  completely  cover  our  problem,  but  what 
it  is  is  an  offset  for  some  tax  policies,  the  tax  policy  where  we  could 
get  a  production  credit,  where  we  could  raise  additional  funds  in 
order  to  keep  our  production  going. 

For  example,  if  you  have  production  and  it  is  a  declining  asset 
and  production  is  going  down,  if  you  can  take  some  cash  flow  that 
you  could  get  from  reduced  taxes.  Right  now  we  are  not  paying  a 
lot  of  tax  because  we  are  losing  money,  we  don't  have  a  positive 
cash  flow.  The  reason  for  this  proposed  import  fee,  there  are  two 
reasons.  One  is  to  pay  for  the  proposed  production  credit  that  Rep- 
resentative Mike  Ajidrews  proposed,  which  would  give  cash  flow  to 
producers  in  order  to  be  able  to  reinvest  that  and  keep  the  produc- 
tion from  falling. 

The  other  rationale  and  necessity  for  something,  and  it  has  come 
up  now  because  of  the  steep  drop  in  prices  and  it  doesn't  look  like 
it  is  going  to  turn  around  soon,  is  the  very  low  price  that  makes 
just  our  base  production  uneconomic.  So  there  are  two  problems. 

One  is  keeping  base  production  alive  with  a  price  that  is  a  floor 
price  that  keeps  us  at  least  at  a  positive  cash  flow  or  else  you  are 
looking  at  losing  a  million  barrels  a  day.  Yes,  there  are  countries 
and  companies  that  can  produce  oil  at  lesser  price  but  the  question 
is  are  we  going  to  let  that  cheaper  oil  come  in  and  lose  100,000  jobs 
and  increase  our  trade  deficit  by  $7  billion?  That  is  the  ultimate 
question. 

Mr.  Payne,  What  would  an  import  tax  of  85  cents  a  barrel  on 
crude  oil  ultimately  cost  the  consumer  per  gallon  of  gasoline? 

Ms.  Lazenby.  Less  than  2  cents. 

Mr.  Payne.  Mr.  Campbell,  won't  there  be  problems  associated 
with  an  import  fee  relative  to  our  GATT  agreement? 

Mr.  Campbell.  Mr.  Chairman,  the  short  answer  to  that  is  no. 
Both  U.S.  trade  laws  and  the  GATT  agreement  recognize  the  need 
for  unilateral  tariffs  in  the  event  that  a  country  such  as  the  United 
States  has  a  national  security  issue.  I  think  there  have  been  a 
number  of  studies,  the  most  recent  completed  in  July  of  this  year, 
indicating  the  trend  we  are  on  in  the  national  refining  industry  is 
creating  a  national  security  issue. 

That  is  at  least  part  of  an  answer  to  my  colleague  who  indicated 
that — the  issue  I  am  talking  about  applies  to  U.S.  manufacturing 
in  general  to  the  degree  that  products  can  be  produced  overseas  at 
less  cost  and  consequently  you  shut  it  down  here.  The  difference 
between  our  industry  and  the  rest  of  manufacturing  is  the  issue 


1291 

around  national  security,  so  it  does  not  conflict  with  the  GATT 
agreement. 

Mr.  Payne.  I  have  also  one  question  concerning  mineral  re- 
sources, and  Mr.  Alfers,  you  mentioned  as  you  began  your  testi- 
mony that  you  weren't  sure  whether  this  is  private  land  or  public 
land  and  I  am  not  sure  either.  I  understand  that  there  are  a  mil- 
lion-plus hard  rock  mining  claims  now  on  Federal  lands  based  on 
the  mining  laws  of  1872,  and  my  question  to  you  is:  Do  you  feel 
that  it  would  be  appropriate  on  Federal  lands  for  those  who  extract 
hard  rock  minerals  to  pay  something  in  terms  of  a  royalty  or  sever- 
ance tax  back  to  the  taxpayers  as  those  minerals  are  extracted? 

Mr.  Alfers.  This  issue  of  a  fair  return  to  the  public  has  been 
aired  now  since  1989,  and  the  industry  has  come  to  supporting  a 
bill  that  has  passed  the  Senate  that  includes  both  holding  fees  and 
a  royalty.  Those  holding  fees  have  been  introduced  as  part  of  the 
budget  process  for  the  past  couple  of  years  and  have  had  quite  an 
impact.  Just  as  of  September  1993,  we  are  now  able  to  see  how  the 
small  business  operators  in  the  mining  industry  have  so  quickly  re- 
sponded to  just  this  $100  holding  fee. 

Many  thought  it  would  be  very  small  and  very  little  impact,  and 
there  were  those  who  would  argue  that  taxes  on  an  industry  like 
this  can  simply  be  passed  on  somewhere.  We  have  learned  in  the 
past  couple  of  weeks  that  claims  are  dropping.  We  don't  know  ex- 
actly how  much.  A  newspaper  on  the  West  Coast  reported,  esti- 
mated between  60  and  80  percent  of  the  holdings  of  these  mining 
claims  will  be  dropped. 

That  is  important  for  all  of  us  trying  to  project  revenue  impacts 
and  economic  impacts,  because  a  $100  fee  on  a  claim  that  is 
dropped  yields  $0,  not  $100.  So  it  underscores  the  point  that  when 
we  impose  a  tax  on  mining  on  these  public  lands,  whether  it  is  a 
holding  fee  or  a  royalty,  we  are  dealing  with  an  industry  that  can- 
not pass  on  these  burdens.  They  deal  in  a  highly  competitive  mar- 
ket especially  in  the  case  of  metals.  The  response  will  be  to  drop 
their  land  holdings,  close  or  downsize  mines  or  cut  their  explo- 
ration projects  and  send  them  elsewhere.  We  are  seeing  evidence 
of  that  now. 

Mr.  Payne.  I  think  you  mentioned  that  the  average  margin  was 
8  or  9  percent.  Is  there  a  differential  between  the  private  land  and 
public  lands  profit  differential? 

Mr.  Alfers.  I  have  not  seen  one  that  has  shown  up  in  our  data. 
We  didn't  specifically  look  project  by  project  to  test  profit  margins. 
The  profit  margins  tended  to  be  more  of  a  variance  of  the  life  of 
the  mine,  the  commodity  and  the  current  prices  and  not  a  fact  that 
they  are  on  public  lands  or  private  lands. 

Mr.  Payne.  But  wouldn't  it  be  true  that  the  cost  of  goods  would 
be  higher  on  private  lands  where  more  payments  would  have  to  be 
made  than  on  public  lands? 

Mr.  Alfers.  In  some  cases  that  may  be  so,  where  there  may  be 
a  greater  burden  of,  say,  private  royalties.  The  fact  is  that  a  mining 
project  whether  a  public  lands  project  or  private  lands  project 
stands  many  royalties  because  in  the  mining  business,  the  royalty 
is  really  compensation  for  those  along  the  chain  of  title  in  a  project 
that  have  made  contributions  and  led  to  the  discovery  of  the  de- 
posit. 


1292 

That  is  so  on  private  lands  and  public  lands.  So  a  prospector  on 
public  land  who  discovers  a  project  and  turns  that  project  to  a 
major  mining  company  will  have  a  royalty  very  much  like  a  private 
royalty.  So  it  is  not  fair  to  see  this  as  an  unlevel  playing  field. 

On  the  private  side,  those  who  contribute  to  the  discovery  of  a 
project  are  often  rewarded  for  that,  and  that  is  also  so  for  those 
prospectors  and  explorers  on  public  lands.  I  wouldn't  expect  to  see 
a  big  differential  there. 

It  is  also  fair  to  say  that  a  high  tax  in  the  area  of,  say,  12  per- 
cent on  the  gross  or  high  royalties  would  no  doubt  disadvantage 
public  lands,  because  that  sort  of  burden  is  not  common  in  the  pri- 
vate sector.  Ordinarily,  one  does  not  have  to  negotiate  for  140  per- 
cent of  the  margins  to  obtain  a  project  in  the  private  sector.  So 
these  royalties  and  these  taxes  would  tend  to  drive  projects  some- 
where else,  overseas,  private  lands  if  we  have  them. 

In  this  country,  private  lands  is  no  refuge  for  the  mining  indus- 
try. Public  lands  occupy  nearly  a  third  of  the  land  area  of  the  Unit- 
ed States  and  in  the  areas  where  the  minerals  occur,  it  is  a  much 
higher  percentage  than  that — 90  percent  in  some  western  states, 
95  percent  in  Alaska.  These  are  all  public  lands,  and  if  we  effec- 
tively deny  access  to  these  public  lands,  there  is  no  place  for  that 
industry  to  go.  There  is  not  enough  private  land  with  minerals  on 
them  in  order  to  fill  that  gap.  We  are  seeing  now  the  exploration 
dollars  going  overseas  and  that  is  likely  where  it  will  go. 

Mr.  Payne.  You  said  that  your  industry  was  supporting  the  ac- 
tions of  the  Senate.  What  did  the  industry  decide  to  support? 

Mr.  Alfers.  The  industry  supports  Senator  Craig's  bill  which 
has  passed  the  Senate.  It  is  a  bill  that  has  among  other  things  a 
holding  fee  on  the  holding  of  mining  claims,  a  production  royalty 
on  the  production  of  minerals  off  of  mining  claims,  an  abandoned 
mine  land  fund,  some  reform  of  the  reclamation  bonding,  some  pro- 
visions to  assure  compliance  and  reclamation  of  all  permitted 
mines  on  public  lands.  But  the  main  distinction  between  the  ap- 
proaches in  the  Senate  and  the  approaches  in  the  House  are  really 
in  this  royalty. 

On  the  Senate  side,  it  is  a  royalty  that  is  based  on  the  net  profits 
from  the  mining.  It  is  not  exactly  a  net  profit  as  some  may  know 
it,  but  it  is  net  of  mining  costs  and  then  downstream  processing 
cost. 

On  the  Senate  side,  we  have  a  royalty  based  on  the  gross  pro- 
ceeds received  from  the  sale  of  a  finished  product.  There  is  some- 
thing unfair  about  that  gross  proceeds  approach.  A  gross  proceeds 
approach  has  no  analog  anywhere  that  I  know  of  It  is  not  like  Fed- 
eral royalties  on  coal;  it  is  not  like  Federal  royalties  on  gas.  Those 
royalties  are  paid  at  the  well  head  in  the  case  of  oil  and  gas,  and 
they  are  paid  at  mine  mouth  in  the  case  of  coal. 

The  royalty  in  the  House  bill  is  on  a  finished  product  of,  say, 
gold.  It  is  not  like  those  other  products.  In  the  case  of  metals  min- 
ing, which  we  spent  some  effort  to  analyze  these,  there  was  a  lot 
of  value  added  from  the  mouth  of  the  mine  to  market.  That  is  the 
problem.  That  is  why  we  see  this  arithmetic  that  says  an  8  percent 
royalty  can  swallow  80,  85  percent  of  the  profit  margin. 

The  Senate  bill  measures  the  royalty  at  the  mine  mouth.  That 
means  profitable  mines  pay  the  royalty,  less  profitable  mines  carry 


1293 

a  lesser  burden,  but  they  are  allowed  to  stay  open.  We  save  the 
jobs  and  we  continue  the  life  of  the  mines  somewhat  longer  and 
they  can  that  way  fund  the  reclamation  that  is  already  required  in 
the  permits. 

Mr.  Payne.  Thank  you. 

Mr.  Hoagland. 

Mr.  Hoagland.  Mr.  Alfers,  have  you  had  a  chance  to  review  the 
testimony  that  will  be  presented  in  the  next  panel  by  Friends  of 
the  Earth? 

Mr.  Alfers.  I  haven't  seen  it.  Before  I  walked  up  here,  I  just  saw 
a  couple  of  pages  of  that. 

Mr.  Hoagland.  Maybe  you  are  unable  to  respond  then  to  some 
of  the  statements  in  the  second  section  of  their  testimony,  impose 
a  severance  tax  on  hard  rock  minerals.  I  will  read  the  initial  para- 
graph. 

"Hard  rock  mining  has  come  under  increasing  scrutiny  for  its 
legacy  in  environmental  and  social  damage.  The  Mineral  Policy 
Center  recently  documented  the  vast  environmental  damage  caused 
by  more  than  a  half  million  abandoned  hard  rock  mines  in  its  re- 
port, "Burden  of  Guilt."  Left  behind  aft;er  mining  companies  pull 
out  of  mines  are  wastes  containing  highly  toxic  substances  such  as 
arsenic,  asbestos,  cyanide  and  mercury.  These  wastes  contaminate 
nearby  air,  land,  water  and  underground  aquifers."  And  then  it 
continues  to  study  data  collected  by  the  World  Resources  Institute. 
And  their  concern  sounds  like  the  huge  piles  of  tailings  that  are 
left  behind  untended.  And  that  it  would — ^to  clean  up  and  restore 
areas  surrounding  mines  requires  billions  of  dollars,  between  $32 
and  $71  billion  they  estimate  here. 

Mr.  Alfers.  I  will  try  to  respond  to  that.  I  haven't  had  a  chance 
to  review  it  carefully.  First,  it  is  important  to  draw  a  distinction 
between  the  reclamation  of  mines  from  the  past  and  the  reclama- 
tion of  mines  now.  I  thought  I  heard  you  using  the  present  tense 
there. 

Mines  permitted  today  require  reclamation,  so  it  is  a  mistake  to 
try  to  impose  too  harsh  a  burden  on  those  who  are  doing  the  envi- 
ronmental job  to  pay  for  something  in  the  past.  Mining  companies 
reclaim  today.  Did  they  always  reclaim?  No;  no  more  than  manu- 
facturers or  anybody  else  who  operated  before  the  word  environ- 
mental even  found  its  way  into  our  lexicon. 

We  have  a  problem  here  with  abandoned  mines  from  the  past 
and  there  are  lots  of  solutions.  I  rather  think  that  the  numbers 
that  we  see  from  the  Mineral  Policy  Center  are  a  little  overblown. 
But  whether  they  are  or  not,  what  is  important  is  not  to  get  the 
cart  before  the  horse. 

We  should  figure  out  what  the  problem  is  and  how  to  solve  it  be- 
fore we  try  to  fund  it.  A  number  of  ways  to  solve  these  abandoned 
mine  problems  is  to  encourage  the  remining  of  these  projects,  for 
example.  If  they  are  remined  and  permitted,  they  will  be  reclaimed, 
and  we  are  seeing  examples  of  that  now  around  the  West.  So  I 
think  we  should  all  take  a  look  at  this  problem. 

The  Senate  bill  which  industry  supports  provides  for  an  mind 
land  reclamation  fund,  an  abandoned  mine  fund,  and  we  would  like 
to  see  this  problem  solved,  but  we  should  get  our  arms  around  the 
magnitude  of  it  before  we  try  to  fund  it. 


1294 

Mr.  Kelly.  Could  I  have  a  quick  response  from  an  iron  ore  per- 
spective? I  would  say  that  the  lady  that  you  are  referring  to  from 
what  you  have  read  has  to  be  exaggerating.  It  sounds  like  there  is 
a  Love  Canal  in  every  county  in  the  United  States,  and  I  think  this 
has  to  be  an  exaggeration. 

I  also  want  to  say  that  iron  ore  happens  to  be,  and  that  is  what 
I  represent  here,  an  inert  waste  problem,  and  is  not  of  any  con- 
sequence whatsoever.  I  agree  with  Mr.  Alfers  on  the  reclamation 
requirements,  but  I  would  also  and  moreover  say  that  we  have  a 
Superfund  law  and  we  have  state  laws  such  as  in  Michigan — it  is 
the  307  sites — and  these  are  mines  that  have  previously  been 
closed. 

And  there  is  a  tremendous  effort  being  done  to  find  the  respon- 
sible parties,  and  through  the  Superfund  law,  they  are  being 
cleaned  up,  we  think  not  at  quite  the  rate  they  should  be,  but  1 
think  that  is  a  deficiency  in  the  Superfund  law,  which  is  of  course 
not  our  subject  here  today. 

Ms.  Lazenby.  May  I  make  one  more  comment?  I  would  like  to 
say  that  I  understand  the  administration  is  considering  a  floor 
price,  which  would  take  care  of  or  help  alleviate  this  up  and  down 
ride  on  crude  prices  and  that  the  small  import  fee  would  be  in  com- 
bination with  a  floor  price  and  the  small  import  fee  would  be  used 
to  offset  the  tax  policy  such  as  Congressman  Andrews  proposes  to 
stimulate  domestic  production.  We  need  a  combination,  but  we 
need  something  to  keep  the  bottom  from  falling  out  from  under- 
neath us. 

Mr.  Payne.  Thank  you.  I  thank  the  panel.  It  has  been  interesting 
for  the  subcommittee.  We  appreciate  your  time,  especially  waiting 
while  we  went  to  vote. 

Thank  you. 

Mr.  HOAGLAND.  Good  afternoon,  everyone.  We  now  have  before 
us  panel  6,  and  the  first  witness  that  we  are  to  hear  from  is  Dawn 
Erlandson  from  Friends  of  the  Earth.  Ms.  Erlandson. 

STATEMENT  OF  DAWN  ERLANDSON,  DIRECTOR  OF  TAX 
POLICY,  FRIENDS  OF  THE  EARTH 

Ms.  Erlandson.  Thank  you.  Mr.  Chairman  and  members  of  the 
committee,  good  afternoon.  I  am  Dawn  Erlandson,  director  of  tax 
policy  for  Friends  of  the  Earth.  Friends  of  the  Earth  is  a  global  en- 
vironmental advocacy  group  with  affiliates  in  50  other  countries. 
Thank  you  for  the  opportunity  to  appear  before  the  committee 
today  on  behalf  of  Friends  of  the  Earth  to  express  our  support  for 
three  of  the  miscellaneous  revenue  proposals  before  you. 

They  include  expansion  of  the  tax  on  ozone  depleting  chemicals, 
a  severance  tax  on  hard  rock  minerals,  and  disallowance  of  deduc- 
tions for  environmental  malfeasance.  These  proposals  represent  op- 
portunities not  only  to  raise  revenues  for  the  Federal  Treasury,  but 
also  to  further  environmental  protection.  The  tax  on  ozone  deplet- 
ing chemicals  is  one  of  the  most  powerful  tools  that  Congress  has 
created  to  protect  the  ozone  layer.  Unfortunately  all  chemicals  that 
deplete  the  ozone  layer  are  not  taxed. 

Accordingly,  we  urge  the  committee  to  cover  those  chemicals. 
They  include  methyl  bromide,  hydrochlorofluorocarbons  or  HCFCs, 
and  hydrobromofluorocarbons  or  HBFCs.  Methyl  bromide  is  a  wide- 


1295 

ly  used  fumigant  pesticide  that  not  only  depletes  the  ozone  layer, 
but  is  extremely  toxic.  Methyl  bromide  is  currently  responsible  for 
5  to  10  percent  of  ozone  depletion  and  if  emissions  continue  to  in- 
crease, it  will  be  responsible  for  15  percent  of  ozone  depletion  by 
2000. 

Industry  is  marketing  HCFCs  as  bridge  chemicals  between  CFCs 
and  ozone  safe  alternatives,  yet  some  HCFCs  are  as  damaging  as 
methyl  chloroform,  which  is  already  taxed.  Further  scientific  re- 
search conducted  by  NOAA  shows  that  HCFCs  are  more  damaging 
to  the  ozone  layer  than  previously  thought.  Industry  is  developing 
HBFCs  to  replace  firefighting  chemicals  known  as  halons,  yet 
ozone  safe  alternatives  to  nalons  exist. 

It  is  important  to  note  that  Congress  has  previously  taxed  all 
chemicals  controlled  by  the  Montreal  protocol.  In  addition,  all 
chemicals  categorized  as  class  one  substances  under  the  Clean  Air 
Act  are  taxed.  Since  the  committee  last  amended  this  tax,  the  par- 
ties to  the  Montreal  protocol  met  in  November  1992  in  Copenhagen 
and  listed  all  three  chemicals  as  controlled  substances. 

In  addition,  they  proposed  phasing  out  HBFCs  by  1996,  freezing 
consumption  of  methyl  bromide  at  1991  levels  in  1995,  and  requir- 
ing industrialized  countries  to  cap  HCFC  use  in  1996  and  phase  it 
out  by  2030.  In  February  EPA  proposed  listing  methyl  bromide  and 
HBFCs  as  class  one  substances  under  the  Clean  Air  Act  and  accel- 
erating the  HCFC  phase  out  schedule.  They  also  proposed  freezing 
production  of  methyl  bromide  at  1991  levels  by  1994  and  phasing 
it  out  by  2000,  as  well  as  phasing  HBFCs  out  by  1996. 

More  than  a  half  million  abandoned  hard  rock  mines  have  con- 
taminated the  air,  land  and  water  of  nearby  communities.  Hard 
rock  mining  produces  massive  quantities  of  waste  and  a  trail  of 
toxics,  including  arsenic,  cyanide,  asbestos  and  mercury.  Given  the 
legacy  of  environmental  degradation  associated  with  hard  rock 
mining,  we  urge  the  committee  to  adopt  a  broad-based  severance 
tax  on  hard  rock  minerals  as  both  a  means  to  compensate  tax- 
payers in  affected  communities  for  the  value  of  the  resource  ex- 
tracted and  for  the  waste  and  pollution  left  behind,  as  well  as  a 
funding  mechanism  for  cleanup  and  reclamation. 

Estimates  of  the  costs  of  reclamation  range  from  $20  to  $70  bil- 
lion. Of  course,  any  severance  tax  adopted  should  complement  cur- 
rent efforts  to  reform  the  1872  mining  law.  Yet  as  the  focus  of  min- 
ing reform  law  is  on  public  lands,  85  percent  of  hard  rock  mining 
occurs  on  non-Federal  lands.  Clearly  then  a  broad  severance  on  all 
extraction  rather  than  on  extraction  from  Federal  lands  only  would 
raise  the  most  revenue. 

Finally,  when  the  Exxon  Valdez  ran  aground  off  the  coast  of 
Alaska,  we  were  horrified  at  the  devastation  that  resulted.  Some- 
what relieved,  we  learned  that  Exxon  would  have  to  pay  over  $1 
billion  to  the  Government  for  the  disaster.  What  few  of  us  know  is 
that  that  $1  billion  was  tax  deductible  and  that  Exxon  was  able  to 
reduce  its  tax  bill  and  therefore  shift  $250  million  or  one-fourth  of 
the  settlement  cost  to  America's  other  taxpayers.  Outrageous  but 
perfectly  legal. 

Under  current  law,  companies  that  pollute  the  environment, 
whether  by  illegally  dumping  toxic  wastes  or  spilling  oil,  can  de- 
duct the  associated,  costs  as  ordinary  and  necessary  business  ex- 


1296 

penses.  What  are  not  ordinary  and  necessary  business  expenses 
under  current  law  include  illegal  bribes  and  kickbacks,  net  gam- 
bling losses  and  lavish  meal  or  beverage  expenses.  Even  this  com- 
mittee and  this  Congress  have  found  it  appropriate  to  limit  the  de- 
ductibility of  certain  business  expenses  associated  with  behavior 
that  is  clearly  less  deplorable  thsm  many  environmental  crimes.  In- 
deed, the  budget  bill  just  adopted  eliminated  business  deductions 
for  lobbying  and  for  executive  pay  over  $1  million. 

The  code  then  denies  business  deductions  for  normative  reasons 
in  order  to  engender  policies  of  less  than  critical  concern,  yet  there 
are  no  such  limitations  on  illegal  environmental  pollution  and  deg- 
radation. It  is  time  that  the  Federal  tax  law  reflect  the  fact  that 
polluting  this  Nation  is  not  an  ordinary  and  necessary  business  ex- 
pense. We  urge  you  to  adopt  legislation  proposed  by  Congressman 
Gerry  Studds,  H.R.  2441,  and  eliminate  the  ability  of  companies 
that  pollute  the  environment  to  pass  on  their  costs  to  other  tax- 
payers. Thank  you. 

Mr.  HOAGLAND.  Thank  you,  Ms.  Erlandson. 

[The  prepared  statement  follows:] 


1297 


Statement  of 

Dawn  Eriandson 
Director  of  Tax  Policy 
Friends  of  the  Earth 

On  Behalf  of 

Friends  of  the  Earth 

Hoarding 

Miscellaneous  Revenue-raising  Proposals 

Before  the 

Subcommittee  on  Select  Revenue  Measures 

Committee  on  Ways  and  Means 

United  States  House  of  Representatives 


September  8,  1993 


INTRODUCTION 

MR.  CHAIRMAN  AND  MEMBERS  OF  THE  COMMITTEE,  I  am  Dawn 
Eriandson,  Director  of  Tax  Policy  for  Friends  of  the  Earth  (FoE).  Friends  of  the  Earth  • 
is  a  global  environmental  advocacy  organization  with  affiliates  in  50  other  countries. 

Mr.  Chairman,  I  thank  you  for  the  opportuiuty  to  appear  before  the  Committee 
on  behalf  of  Friends  of  the  Earth  to  express  our  strong  support  for  three  of  the 
miscellaneous  revenue  proposals  before  you  today.  These  proposals  represent 
opportunities  not  only  to  raise  revenues  for  the  Federal  Treasury  but  also  to  further 
environmental  protection.   We  urge  the  Committee  to  embrace  these  environmentally 
sound  tax  proposals  as  it  has  similar  proposals  in  the  past  , 


STRENGTHEN  THE  TAX  ON  OZONE-DEPLETING  CHEMICALS 

The  tax  on  ozone-depleting  chemicals  is  one  of  the  most  powerful  tools  Congress 
has  created  to  protect  the  ozone  layer.  This  economic  instrument  has  successfully 
encouraged  industry  to  adopt  alternatives  to  CFCs  and  increase  CFC  recycling.   In  the 
short  period  since  the  tax  took  effea  in  1990,  U.S.  CFC  production  has  dropped 
significantly,  well  below  the  limit  allowed  by  the  Monueal  Protocol,  the  international 
ozone  protection  agreement. 

Unfortunately,  all  chemicals  that  deplete  the  ozone  layer  are  not  taxed. 
Accordingly,  we  urge  the  Committee  to  extend  the  current  tax  on  ozone-depleting 
chemical?,  to  three  additional  kinds  of  chemicals  that  harm  the  ozone  laver  and  threaten 
human  and  ecological  health.  These  chemicals  are  methyl  bromide, 
hydrochlorofluorocarbons  or  HCFCs,  and  hydrobromofluorocarbons  or  HBFCs. 


1298 


We  propose  that  the  Committee  tax  these  chemicals  using  the  same  approach  that  exists 
under  current  law:  the  tax  equals  the  base  tax  rate  multiplied  by  each  chemical's  ozone 
depletion  potential  (ODP).  The  base  rates  established  by  the  Energy  Policy  Act  of  1992 
should  be  used.  These  rates  per  pound  are:  $4.35  in  1994,  $535  in  1995,  $5.80  in  1996, 
$6.25  in  1997,  and  $6.70  in  1998. 


1.         Tax  Methyl  Bromide 

Methyl  bromide  is  a  widely  used  fumigant  pesticide.  It  not  only  depletes  the  ozone 
layer  but  is  extremely  toxic  and  can  be  lethal  if  mishandled.  The  bromine  in  methyl 
bromide  is  a  very  effective  ozone  depleter.  According  to  the  United  Nations  Environment 
Program's  (UNEP)  Methyl  Bromide  Interim  Scientific  Assessment  of  Jime  1992,  methyl 
bromide  is  currently  responsible  for  five  to  ten  percent  of  ozone  depletion,  and  if  emissions 
continue  to  increase  at  current  rates,  it  will  be  responsible  for  fifteen  percent  of  ozone 
depletion  by  2000. 

The  Parties  to  the  Montreal  Protocol  listed  methyl  bromide  as  a  controlled  substance 
in  Annex  E  of  the  November  1992  Copenhagen  amendment  to  the  protocol.  The 
amendment  freezes  industrialized  country  consumption  of  methyl  bromide  at  1991  levels  in 
1995.  The  Parties  resolved  to  decide  on  further  controls  and  a  possible  phaseout  date  by 
no  later  than  their  seventh  meeting  in  1995. 

On  February  16,  1993,  the  U.S.  Environmental  Protection  Agency  aimounced  a 
proposal  to  list  methyl  bromide  as  a  Class  I  Substance  under  Title  VI  of  the  Clean  Air  Act 
Amendments  of  1990.  The  Notice  of  Proposed  Rulemaking  proposes  to  freeze  methyl 
bromide  production  at  1991  levels  by  January  1,  1994  and  phase  out  production  by  January 

1,  2000. 

Congress  has  previously  taxed  all  chemicals  controlled  by  the  Montreal  Protocol.  The 
tax  initially  covered  CFCs  and  halons,  and  subsequently  Congress  expanded  the  tax  to 
include  methyl  chloroform  and  carbon  tetrachloride.  The  expansion  followed  the  June  1990 
London  amendment  to  the  protocol,  which  added  these  chemicals  to  the  list  of  controlled 
substances.  In  addition,  all  chemicals  categorized  as  a  Class  I  Substance  under  the  Clean 
Air  Act  are  subject  to  the  excise  tax. 

Annex  E  of  the  Copenhagen  amendment  to  the  Montreal  Protocol  lists  methyl 
bromide's  ozone  depletion  potential  (ODP)  at  0.7.  Based  on  an  estimated  1991  methyl 
bromide  production  level  of  50  million  pounds  per  year,  a  methyl  bromide  tax  would  yield 
$995.75  million  over  the  1994-1998  period.  This  revenue  estimate,  however,  does  not 
account  for  conservation  measures  which  the  tax  would  initiate  or  a  more  stringent  phaseout 
schedule. 

UNEP's  June  1992  methyl  bromide  assessment  indicates  that  significant  reductions 
in  methyl  bromide  can  be  achieved  during  the  1990s  by  replacing  the  chemical  with 
alternatives,  using  recovery  and  recycling  technology,  and  adopting  improved  practices. 

EPA's  policies  aimed  at  methyl  bromide  will  not  cut  methyl  bromide  consumption 
below  1991  levels  until  2000.  Worsening  ozone  depletion  requires  much  stronger  measures. 
Increasing  the  price  of  methyl  bromide  with  a  tax  will  create  an  incentive  for  industry  to 
immediately  reduce  consumption. 

2.  Tax  HCFCs 

Industry  is  marketing  HCFCs  as  "bridge"  chemicals  between  CFCs  and  ozone-friendly 
alternatives.  Nonetheless,  HCFCs  are  ozone-destroying  chemicals  and  should  not  be  exempt 
from  the  tax.  Indeed,  some  HCFCs  are  as  damaging  as  methyl  chloroform,  which  is  taxed. 
(According  to  the  ODPs  listed  in  the  Montreal  Protocol  and  the  Clean  Air  Act,  HCFC-141B 
and  methyl  chloroform  have  the  same  ODP  of  0.1.) 


1299 


Congress  recognized  the  environmental  impact  of  HCFCs  in  the  Qean  Air  Act 
Amendments  of  1990.  The  Act  requires  HCFC  recycling,  bans  certain  HCFC  applications, 
and  phases  out  HCFC  production  between  2015  and  2030. 

Parties  to  the  Montreal  Protocol  listed  HCFCs  as  controlled  substances  in  the  Annex 
C  of  the  November  1992  Copenhagen  Amendment  to  the  protocol.  The  Amendment 
requires  industrialized  countries  to  cap  HCFC  use  in  1996  and  then  reduce  HCFC 
consumption  by  35%  in  2004,  65%  in  2010,  90%  in  2015,  99.5%  in  2020,  and  100%  in  2030. 

On  February  16,  1993,  the  U.S.  EPA  annoimced  a  Notice  of  Proposed  Rulemaking 
that  proposes  accelerating  the  HCFC  phaseout  schedules  in  the  Qean  Air  Act  on  the  basis 
that  such  reductions  are  necessary  to  fwotect  human  health  and  the  environment  and  that 
they  are  technically  feasible.  The  agency  is  proposing  to  phaseout  HCFC-141B  in  2003, 
HCFC-22  and  HCFC-142B  in  2020.  and  aU  other  HCFCs  in  2030.  The  agency  beUeves 
these  reduction  will  meet  the  HCFC  requirement  of  the  Copenhagen  amendment  to  the 
Montreal  Protocol. 

Scientific  research  conducted  at  the  US  National  Oceanic  and  Atmospheric 
Administration  (NOAA)  shows  that  HCFCs  are  more  damaging  to  the  ozone  layer  than 
previously  thought.  While  their  long-term  ozone-depleting  potentials  (ODPs)  range  from 
2  to  10  percent  of  that  of  CFCs,  their  near-term  (5  to  10  years)  ODPs  are  much  higher.  For 
example,  HCFC-22  has  an  ODP  of  0.19  over  5  years  and  0.17  over  10  years  while  its  steady- 
state  ODP  is  only  0.05. 

Ozone-safe,  chemical-free  alternatives  and  less  harmful  chemicals  to  the  ozone  layer, 
such  as  HFCs,  have  been  developed.  While  HCFCs  and  HFCs  tend  to  contribute  to  cUmate 
change,  HFCs  tend  to  be  more  expensive  than  HCFCs.  Taxing  HCFCs  would  encourage 
industry  to  adopt  the  most  environmentally  sound  alternatives. 

Based  on  estimates  of  ODP-weighted  HCFC  production  in  the  United  States,  an 
HCFC  tax  would  yield  $753.02  million  over  the  1994-1998  period. 

3.         Tax  HBFCs 

HBFCs  are  chemicals  that  industry  is  developing  to  replace  fire-fighting  chemicals 
known  as  halons.  HBFCs  have  higher  ODPs  than  HCFCs.  For  example.  Fire  Master  100 
(HBFC-22B1),  developed  by  Great  Lakes  Chemical  to  replace  Halon-1301  and  Halon-1211, 
has  an  ODP  of  0.7.) 

Industry  has  developed  ozone-safe  alternatives  to  halons.  For  example,  Ansul  Fire 
Protection  is  manufacturing  a  halon  replacement  called  Inergen,  which  has  an  ODP  of  0. 

Parties  to  the  Montreal  Protocol  listed  HBFCs  as  controlled  substances  in  Armex  C 
of  the  Copenhagen  Amendment.  Due  to  then-  high  ODPs,  the  Parties  agreed  to  phase  out 
HBFCs  by  January  1,  1996,  on  the  same  schedule  as  CFCs. 

EPA's  Notice  of  Proposed  Rulemaking  proposes  listing  HBFCs  as  Class  I  Substances 
and  phasing  them  out  by  January  1,  1996. 


IMPOSE  A  SEVERANCE  TAX  ON  HARD  ROCK  MINERALS 

Hardrock  mining  has  come  imder  increasing  scrutiny  for  its  legacy  of  envirbnmeptal 
and  social  damage.  The  Mineral  Policy  Center  recently  documented  the  vast  environmental 
damage  caused  by  more  than  half  a  mUlion  abandoned  hardrock  mines  in  its  report,  Burden 
of  Guilt.  Left  behind  after  mining  companies  pull  out  of  mines  are  wastes  containing  highly 
toxic  substances  such  as  arsenic,  asbestos,  cadmium,  cyanide,  and  mercury.  These  wastes 
contaminate  nearby  air,  land,  water  and  underground  aquifers,  thus  threatening  human 
health  as  well  as  the  economic  vitality  of  neighboring  communities. 


1300 


In  addition  to  a  trail  of  toxics,  mining  operations  leave  behind  massive  quantities  of 
waste.  According  to  unpublished  data  from  the  World  Resources  Institute,  much  of  the 
excavated  material  from  mining  operations  is  waste.  For  both  metals  and  non-metallic 
minerals,  overburden  waste  accounts  for  29  percent  of  the  total  metric  tons  of  material 
mined.  For  metals  such  as  phosphorus  and  copper,  overburden  wastes  account  for  57 
percent  of  the  total  material  mined.  And  in  the  case  of  gold,  overburden  waste  accounts 
for  a  whopping  78  percent  of  the  total  material  excavated. 

Given  the  legacy  of  environmental  degradation  associated  with  hardrock  mining,  we 
urge  the  Committee  to  consider  adoption  of  a  broad-based  severance  tax  on  hardrock 
minerals  as  both  a  means  to  compensate  taxpayers  and  affected  communities  for  the  value 
of  the  resource  extracted  and  for  the  waste  and  pollution  left  behind  and  a  funding 
mechanism  for  cleanup  and  restoration.  Such  a  tax  would  be  levied  as  hardrock  minerals 
are  removed,  or  "severed,"  from  the  mine.  The  rate  of  tax  as  proposed  would  be  12  percent 
of  the  value  of  the  removal  price  of  the  mineral. 

To  clean  up  and  restore  areas  surrounding  mines  requires  billions  of  dollars.  The 
Mineral  Policy  Center  estimates  that  cleanup  costs  range  from  $32.7  to  $71.5  billion.  A 
severance  tax  such  as  the  one  under  consideration  by  the  Committee  could  provide  essential 
resources  to  undertake  the  desperately  needed  cleanup.  Precedence  for  such  a  dedicated 
fund  exists  in  the  form  of  the  Abandoned  Mine  Land  Fund  for  restoring  abandoned  coal 
mines.   Such  a  fund  could  be  financed  with  a  reclamation  fee  or  a  severance  tax. 

As  you  know,  the  Committee  on  Natural  Resources  is  in  the  process  of  reforming  the 
Mining  Law  of  1872  and  is  examining  the  issue  of  royalties.  The  environmental  community 
strongly  supports  reform  and  has  endorsed  reform  legislation,  H.R.  322.  We  urge  the  Ways 
and  Means  Committee  to  work  closely  with  the  Committee  on  Natural  Resources  to  adopt 
a  suitable  reform  plan  that  includes  severance  taxes. 

Much  of  the  focus  of  reform  of  the  1872  Mining  Law  is  on  the  management  of 
hardrock  mining  operations  on  public  lands.  However,  environmental  damage  caused  by 
hardrock  mining  does  not  occur  only  on  federal  lands.  In  fact,  an  estimated  85  percent  of 
hardrock  mining  actually  occurs  on  non-federal  lands.  These  lands  include  private,  state- 
owned  and  federal  lands  that  have  been  "patented"  by  private  companies  for  mining. 

Clearly,  the  greatest  revenue  to  be  raised  would  come  from  a  broad-based  severance 
tax  on  all  extraction  rather  than  on  extraction  from  federal  lands  only.  An  ancillary  benefit 
of  a  broad  severance  tax  would  allow  the  federal  government  to  collect  some  financial 
remuneration  from  companies  that  have  taken  title  to  public  land  through  patents.  Under 
current  law,  patenting  precludes  the  federal  government  from  collecting  royalties  from  the 
mining  companies.  Historically,  mining  companies  have  patented  lands  when  they  feared 
the  imposition  of  royalties  on  the  minerals  removed.  Recently,  the  Bureau  of  Land 
Management  has  been  deluged  with  patent  applications  by  miners  seeking  to  avoid  paying 
the  royalties  which  seem  imminent  in  the  proposed  reform  of  the  1872  Mining  Law. 

Many  states  have  some  form  of  severance  tax  on  hardrock  mining.  Generally,  these 
severance  taxes  apply  to  all  mining,  not  just  that  on  state-owned  lands.  Since  many  states 
already  impose  severance  taxes,  it  would  be  relatively  simple  to  follow  with  a  federal 
severance  tax.  Further,  the  existence  of  both  state  and  federal  levies  on  cigarettes  and 
gasoline  demonstrate  that  the  existence  of  a  tax  at  one  level  does  not  preclude  the  existence 
of  a  similar  tax  at  another  level. 

As  it  is  clear  that  taxpayers  have  an  interest  in  assuring  that  public  lands  not  be 
ravaged  by  profit-seeking  mining  operators  and  that  they  be  duly  compensated  for  the  value 
of  the  mineral  as  well  as  cleanup  costs  and  environmental  restoration  associated  with  the 
mining  wastes,  we  submit  that  a  federally-imposed  severance  tax  be  adopted  in  order  to 
further  the  public  interest. 


1301 


DISALLOW  DEDUCTIONS  FOR  ENVIRONMENTAL  MALFEASANCE 

In  1989,  the  Exxon  Valdez  ran  aground  off  the  coast  of  Alaska  and  spilled  nearly  11 
million  gallons  of  crude  oil  into  Prince  William  Sound.  In  1991,  Exxon  reached  a  settlement 
with  the  Federal  Government  and  the  State  of  Alaska  in  which  it  agreed  to  pay  $1,025 
billion  in  fines  and  damages  to  repair  the  vast  environmental  destruction  to  the  Alaskan 
shoreline.  Of  the  $1,025  billion,  only  $25  million  was  an  actual  fine  and,  under  current  law, 
not  tax  deductible.  The  remainder  of  the  settlement,  however,  was  characterized  as 
restitution  and  therefore  was  and  is  tax  deductible.  Indeed,  $1  billion  in  clean-up  costs, 
legal  fees,  damages,  and  even  the  11  million  gallons  of  oil  that  devastated  the  Soimd  were 
tax  deductible. 

The  effect  of  the  ability  of  Exxon  to  deduct  these  costs  from  its  tax  bill  were 
dramatic.  According  to  analyses  done  by  the  National  Wildlife  Federation  and  the  Alaska 
State  Legislature,  the  value  of  the  $1  billion  in  federal  and  state  tax  dedurtions  to  Exxon 
ranged  from  $279  to  298  million  dollars  in  reduced  tax  liability.  The  National  Wildlife 
Federation  estimated  that  Exxon  would  reduce  its  federal  tax  bill  by  $257  million  and  its 
Alaskan  tax  bill  by  $22  million.'  As  a  result,  Exxon  successfully  shifted  part  of  its 
responsibility  for  the  devastation  it  wrought  in  Alaska  to  America's  taxpayers,  some  of  whom 
lived  in  Alaska  and  suffered  direct  damage  from  the  spill. 

Last  Congress,  Congressman  Frank  Guarini  recognized  the  outrageousness  of 
requiring  American  taxpayers  to  assume  even  part  of  the  responsibility  for  a  company's 
negligent,  even  intentional,  pollution  of  the  environment.  He  introduced  legislation,  H.R. 
1726,  to  limit  tax  deductions  in  cases  of  environmental  malfeasance. 

This  Congress,  Chairman  Gerry  Studds  has  offered  comparable  legislation,  H.R.  2441. 
Chairman  Studds  bill  would  disallow  deductions  for  amounts  paid  pursuant  to  settlements 
and  for  compensatory  damages  under  certain  environmental  laws.  The  money  saved  by 
eliminating  this  tax  break  would  be  used  as  an  offset  for  tax  relief  for  people  who  pay  a 
disproportionately  high  percentage  of  their  income  for  sewer  and  water  services.  We  urge 
the  Committee  to  adopt  Chairman  Stucjds  legislation  ^nd  limit  thg  ability  pf  companies  that 
pollute  the  environment  to  pa.ss  on  their  costs  to  other  taxpayers. 

Under  current  tax  law,  companies  that  pollute  the  environment,  whether  by  spilling 
oil  or  dumping  toxic  wastes  illegally,  are  allowed  to  deduct  all  the  costs  associated  with  the 
pollution  as  ordinary  and  necessary  business  expenses,  even  though  the  companies  were 
found  to  have  broken  the  law. 

Some  would  argue  that  these  costs  should  continue  to  be  deductible  because  the 
purpose  of  the  Code  is  to  raise  revenues  and  that  businesses,  whether  good  or  evil,  are  taxed 
on  their  net  incomes.  Since  ill-gotten  gains  are  taxed,  some  aigae,  then  the  costs  of 
producing  such  gains  should  be  deductible.  However,  under  U.S.  tax  law,  all  tax  deductions 
were  once  subject  to  the  so-called  "public  policy  limitation,"  the  thrust  of  which  was  to 
disallow  a  deduction  in  any  instance  where  allowing  the  deduction  would  fi-ustrate  a  sharply 
defined  government  policy.  Tliis  "public  policy  limitation"  remains  in  effect  for  a  few 
business  deductions  that  are  deemed  to  violate  the  public  good  including  illegal  bribes  and 
kickbacks,  treble  damage  payments  under  the  antitrust  laws,  and  fines  and  penalties.^ 


^  Hearing  Record,  Task  Force  on  Urgent  Fiscal  Issues, 
Committee  on  the  Budget,  U.S.  House  of  Representatives,  "Budgetary 
Implications  of  the  Exxon  Valdez  Oil  Spill  Settlement,"  October  31, 
1991,  Washington,  DC. 

^  Asbjorn  Eriksson,  Robert  Hertzog,  John  Tiley,  David 
Williams,  Friedrich  von  Zezschwitz,  Taxation  for  Environmental 
Protection;  A  Multinational  Legal  Study,  ed.  Sanford  E.  Gaines  and 
Richard  A.  Westin  (Westport,  CT:  Quor\im  Books,  1991),  pp.  187  - 
189. 


1302 


Even  this  Committee  and  this  Congress  have  found  it  appropriate  to  limit  the 
deductibility  of  certain  business  expenses  associated  with  behavior  that  is  clearly  less 
deplorable  than  oil  spills  or  dumping  of  toxic  wastes.  Indeed,  the  budget  bill  that  the 
Congress  just  passed  eliminated  the  business  deductions  for  lobbying  expenses  and  executive 
pay  over  $1  million.  It  further  limited  the  deduction  for  business  meals  and  entertaimnent 
expenses  to  50  percent,  thereby  complementing  current  law  which  denies  all  deductions  for 
meal  or  beverage  expenses  that  are  lavish  or  extravagant. 

The  Code,  then,  denies  business  deductions  for  normative  reasons  in  order  to 
engender  policies  of  less  than  critical  concern,  yet  there  are  no  such  limitations  on  producers 
of  environmental  pollution  and  waste.  No  justifiable  reason  can  explain  why  we  deny 
business  deductions  for  high  executive  pay  and  lobbying  expenses  while  allowing  deductions 
for  expenses  related  to  illegal  environmental  devastation.  Failing  to  bar  taxpayers  from 
claiming  deductions  for  environmentally  destructive  business  behavior  amounts  to  a  tax 
subsidy  for  prima  facie  illegitimate  behavior.' 

The  Studds  bill  sends  the  right  messages  to  corporate  polluters.  Continuing  to  allow 
income  tax  deductions  for  violations  of  environmental  laws  seriously  undermines  the 
deterrent  effect  of  the  environmental  laws.  In  many  cases,  it  may  be  cheaper  for  a  company 
to  risk  a  violation  than  to  invest  in  prevention.  Thus,  denying  deductions  for  environmental 
cleanup  expenses  would  provide  a  significant  incentive  for  companies  to  comply  with  this 
nation's  environmental  laws,  and  to  safeguard  against  negligence.  Contrary  to  industry 
arguments,  denying  deductions  would  not  frustrate  expenditures  for  enviroimiental  cleanup 
because,  under  law,  the  companies  must  clean  up.  TTiere  is  no  need  to  provide  incentives 
to  obey  the  law.  It  is  time  the  federal  tax  code  reflected  the  fact  that  polluting  this  nation 
is  not  an  ordinary  and  necessary  business  expense. 

This  Committee  has  heard  in  the  past  about  the  perverse  effects  of  current  U.S.  tax 
policy  on  the  environment.  Allowing  a  tax  deduction  for  cleanups  associated  with 
environmental  crimes,  at  a  time  when  honest  taxpayers  cannot  afford  adequate  water  and 
sewage  service,  is  the  quintessential  example  of  this  perversity.  Currently,  we  give  tax  breaks 
to  polluters,  while  communities  cannot  pay  their  sewer  and  water  bills  because  of  the  high 
costs  of  dealing  with  water  pollution.  The  Studds  bill  addresses  this  incongruity.  Polluters 
must  pay  for  the  harms  that  they  cause,  only  then  will  they  recognize  the  true  costs  of  their 
actions.  The  American  taxpayer  must  no  longer  subsidize  behavior  that  is  environmentally 
irresponsible. 


'  Ibid. 


1303 

Mr.  HOAGLAND.  Mr.  Merlis. 

STATEMENT  OF  EDWARD  A.  MERLIS,  SENIOR  VICE  PRESI- 
DENT, EXTERNAL  AFFAIRS,  AIR  TRANSPORT  ASSOCIATION 
OF  AMERICA 

Mr.  Merlis,  Thank  you,  Mr.  Chairman.  I  appreciate  the  oppor- 
tunity to  appear  before  you  today  to  discuss  several  revenue  meas- 
ures which  will  have  a  substantial  impact  upon  the  financial  health 
of  the  U.S.  air  carriers.  I  am  Edward  Merlis,  senior  vice  president 
of  the  Air  Transport  Association  of  America.  ATA's  17-member  car- 
riers flv  96  percent  of  the  revenue  passenger  miles  and  97  percent 
of  the  freight  carried  by  U.S.  flag  carriers. 

The  airline  industry  is  currently  facing  desperate  financial  times. 
Having  suffered  unprecedented  losses  since  1990,  airlines  have 
parked  aircraft,  slashed  capital  orders  and  furloughed  workers. 

As  a  result,  earlier  this  year  the  Congress  established  a  National 
Airline  Commission  to  investigate,  study,  and  make  policy  rec- 
ommendations about  the  financial  health  and  future  competitive- 
ness of  the  U.S.  airlines  and  aerospace  industry.  The  commission 
has  now  completed  its  report  and  documented  industrywide  losses 
of  $10  billion  over  the  last  3  years. 

Among  the  negative  influences  on  airline  industry  health  cited  by 
the  commission  were,  "tax  policies  which  often  have  had  a  major 
and  adverse  effect  on  the  industry."  Although  the  commission  con- 
cluded that  "tax  changes  alone  will  not  restore  the  industry  to  prof- 
itability," it  did  observe  without  hesitation  that  "we  believe  there 
are  several  tax  provisions  that  impede  the  ability  of  the  industry 
to  return  to  financial  health."  Thus,  it  is  with  some  chagrin  that 
the  industry  finds  itself  once  again  in  the  position  of  needing  to  ad- 
dress proposed  changes  to  the  Tax  Code  which  would  adversely  af- 
fect the  environment  in  which  we  operate,  particularly  in  light  of 
the  commission  having  identified  Federal  taxes  totaling  more  than 
$1.5  billion  per  year  that  need  to  be  cut.  Measures  which  in  the 
commission's  words  "violate  reasonable  principles  of  common  sense 
and  good  public  policy." 

Instead  of  appearing  here  today  in  support  of  efforts  by  Congress 
to  implement  the  recommendations  of  your  commission,  we  are 
here  discussing  a  series  of  proposals  which  would  exacerbate  the  fi- 
nancial strains  on  the  industry  and  add  to  the  tally  of  jobs  lost  in 
the  airlines,  aircraft,  and  engine  manufacturers  and  in  the  travel 
and  tourism  industry. 

The  first  proposal  I  would  like  to  address  amends  the  Internal 
Revenue  Code  to  deny  a  business  deduction  for  that  portion  of  the 
cost  of  an  airline  ticket  in  excess  of  coach  fare.  While  the  proposal 
will  be  directed  at  the  business  traveler,  the  true  burden  will  fall 
upon  the  airline  industry  itself  To  the  extent  flyers  switch  to  coach 
as  a  result  of  the  enactment  of  this  proposal,  the  Government  does 
not  gain  any  revenue  and  the  airline  industry  loses  much  needed 
revenue.  Assuming  all  business  travelers,  who  would  otherwise 
travel  in  business  or  first  class  switched  to  coach  class  for  domestic 
tickets  only,  the  U.S.  airline  industry  would  lose  $220  million  per 
year  and  would  in  all  likelihood  lay  off  several  thousand  flight 
attendants. 


1304 

In  actual  practice  we  do  not  expect  all,  nor  do  we  know  which 
business  travelers  who  currently  travel  in  business  or  first  class 
would  switch  to  a  coach  seat.  Some  may,  in  fact,  choose  to  charter 
aircraft  at  greater  cost  to  the  Treasury  and  greater  injury  to  the 
airlines. 

This  proposal  is  particularly  objectionable  to  ATA  member  air- 
lines because  it  arbitrarily  singles  out,  one,  travel  fi^om  other  busi- 
ness expenses  and,  two,  air  travel  fi^om  other  business  travel.  The 
proposal  clearly  and  unfairly  targets  the  airline  industry.  Deduc- 
tions for  business  expenses  for  other  sectors  of  the  travel  industry, 
such  as  hotels,  cruise  lines,  trains  and  rental  cars,  are  not  im- 
pacted bv  this  proposal,  even  though  different  classes  of  service  can 
be  purchased  in  each  and  every  one  of  those  travel  industry 
services. 

Why  should  the  airline  industry,  which  has  been  hemorrhaging 
since  the  beginning  of  this  decade,  be  the  only  travel  industry  com- 
ponent that  must  bear  the  cost  of  this  proposed  change  in  deduc- 
tion policy?  Travel  in  business  or  first  class  is  not  undertaken  on 
a  lark